USB 2016 10-K

US Bancorp (USB) SEC Quarterly Report (10-Q) for Q1 2017

USB Q2 2017 10-Q
USB 2016 10-K USB Q2 2017 10-Q
Table of Contents
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

Delaware 41-0255900

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant's telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES ☑    NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☑    NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☑ Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐    NO ☑

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class Outstanding as of April 30, 2017
Common Stock, $0.01 Par Value 1,685,283,199 shares

Table of Contents

Table of Contents and Form 10-Q Cross Reference Index

Part I - Financial Information

1) Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2)

3

a) Overview

3

b) Statement of Income Analysis

3

c) Balance Sheet Analysis

5

d) Non-GAAP Financial Measures

29

e) Critical Accounting Policies

31

f) Controls and Procedures (Item 4)

31

2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)

8

a) Overview

8

b) Credit Risk Management

9

c) Residual Value Risk Management

21

d) Operational Risk Management

21

e) Compliance Risk Management

21

f) Interest Rate Risk Management

21

g) Market Risk Management

22

h) Liquidity Risk Management

23

i) Capital Management

25

3) Line of Business Financial Review

26

4) Financial Statements (Item 1)

32

Part II - Other Information

1) Legal Proceedings (Item 1)

73

2) Risk Factors (Item 1A)

73

3) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)

73

4) Exhibits (Item 6)

73

5) Signature

74

6) Exhibits

75

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995.

This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe contraction could adversely affect U.S. Bancorp's revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp's results could also be adversely affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management's ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp's Annual Report on Form 10-K for the year ended December 31, 2016, on file with the Securities and Exchange Commission, including the sections entitled "Risk Factors" and "Corporate Risk Profile" contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. However, factors other than these also could adversely affect U.S. Bancorp's results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

U.S. Bancorp 1
Table of Contents

 Table 1  Selected Financial Data

Three Months Ended

March 31,

(Dollars and Shares in Millions, Except Per Share Data) 2017 2016 Percent
Change

Condensed Income Statement

Net interest income

$ 2,945 $ 2,835 3.9

Taxable-equivalent adjustment (a)

50 53 (5.7

Net interest income (taxable-equivalent basis) (b)

2,995 2,888 3.7

Noninterest income

2,300 2,146 7.2

Securities gains (losses), net

29 3 *

Total net revenue

5,324 5,037 5.7

Noninterest expense

2,944 2,749 7.1

Provision for credit losses

345 330 4.5

Income before taxes

2,035 1,958 3.9

Income taxes and taxable-equivalent adjustment

549 557 (1.4

Net income

1,486 1,401 6.1

Net (income) loss attributable to noncontrolling interests

(13 (15 13.3

Net income attributable to U.S. Bancorp

$ 1,473 $ 1,386 6.3

Net income applicable to U.S. Bancorp common shareholders

$ 1,387 $ 1,329 4.4

Per Common Share

Earnings per share

$ .82 $ .77 6.5

Diluted earnings per share

.82 .76 7.9

Dividends declared per share

.280 .255 9.8

Book value per share

25.05 23.82 5.2

Market value per share

51.50 40.59 26.9

Average common shares outstanding

1,694 1,737 (2.5

Average diluted common shares outstanding

1,701 1,743 (2.4

Financial Ratios

Return on average assets

1.35 1.32

Return on average common equity

13.3 13.0

Net interest margin (taxable-equivalent basis) (a)

3.03 3.06

Efficiency ratio (b)

55.6 54.6

Net charge-offs as a percent of average loans outstanding

.50 .48

Average Balances

Loans

$ 273,158 $ 262,281 4.1

Loans held for sale

3,625 3,167 14.5

Investment securities (c)

110,764 106,031 4.5

Earning assets

399,281 378,208 5.6

Assets

441,311 421,557 4.7

Noninterest-bearing deposits

80,738 78,569 2.8

Deposits

328,433 295,878 11.0

Short-term borrowings

13,201 27,399 (51.8

Long-term debt

35,274 34,808 1.3

Total U.S. Bancorp shareholders' equity

47,923 46,738 2.5
March 31,
2017
December 31,
2016

Period End Balances

Loans

$ 273,577 $ 273,207 .1

Investment securities

110,424 109,275 1.1

Assets

449,522 445,964 .8

Deposits

336,873 334,590 .7

Long-term debt

35,948 33,323 7.9

Total U.S. Bancorp shareholders' equity

47,798 47,298 1.1

Asset Quality

Nonperforming assets

$ 1,495 $ 1,603 (6.7 )% 

Allowance for credit losses

4,366 4,357 .2

Allowance for credit losses as a percentage of period-end loans

1.60 1.59

Capital Ratios

Basel III transitional standardized approach:

Common equity tier 1 capital

9.5 9.4

Tier 1 capital

11.0 11.0

Total risk-based capital

13.3 13.2

Leverage

9.1 9.0

Common equity tier 1 capital to risk-weighted assets for the Basel III transitional advanced approaches

11.8 12.2
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized
approach (b)
9.2 9.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced
approaches (b)
11.5 11.7

Tangible common equity to tangible assets (b)

7.6 7.5

Tangible common equity to risk-weighted assets (b)

9.4 9.2

  * Not meaningful
(a) Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.
(b) See Non-GAAP Financial Measures beginning on page 29.
(c) Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.

2 U.S. Bancorp
Table of Contents

Management's Discussion and Analysis

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the "Company") reported net income attributable to U.S. Bancorp of $1.5 billion for the first quarter of 2017, or $0.82 per diluted common share, compared with $1.4 billion, or $0.76 per diluted common share, for the first quarter of 2016. Return on average assets and return on average common equity were 1.35 percent and 13.3 percent, respectively, for the first quarter of 2017, compared with 1.32 percent and 13.0 percent, respectively, for the first quarter of 2016.

Total net revenue for the first quarter of 2017 was $287 million (5.7 percent) higher than the first quarter of 2016, reflecting a 3.9 percent increase in net interest income (3.7 percent on a taxable-equivalent basis) and an 8.4 percent increase in noninterest income. The increase in net interest income from the first quarter of 2016 was mainly the result of loan growth. The noninterest income increase was driven by higher payment services revenue, trust and investment management fees and mortgage banking revenue.

Noninterest expense in the first quarter of 2017 was $195 million (7.1 percent) higher than the first quarter of 2016, due to increased compensation expense related to hiring to support business growth and compliance programs as well as merit increases and higher variable compensation expense.

The provision for credit losses for the first quarter of 2017 of $345 million was $15 million (4.5 percent) higher than the first quarter of 2016. Net charge-offs in the first quarter of 2017 were $335 million, compared with $315 million in the first quarter of 2016. Refer to "Corporate Risk Profile" for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS

Net Interest Income  Net interest income, on a taxable-equivalent basis, in the first quarter of 2017 was $3.0 billion, an increase of $107 million (3.7 percent) over the first quarter of 2016. The increase was principally driven by loan growth, partially offset by a lower net interest margin. Average earning assets were $21.1 billion (5.6 percent) higher than the first quarter of 2016, driven by increases of $10.9 billion (4.1 percent) in loans, $4.7 billion (4.5 percent) in investment securities and higher average cash balances. The net interest margin, on a taxable-equivalent basis, in the first quarter of 2017 was 3.03 percent, compared with 3.06 percent in the first quarter of 2016. The decrease in the net interest margin from the first quarter of 2016 reflected the net impact of loan mix, lower yield on securities purchased, higher rates paid on deposits, and a shift in interest-bearing liabilities mix. Refer to the "Consolidated Daily Average Balance Sheet and Related Yields and Rates" table for further information on net interest income.

Average investment securities in the first quarter of 2017 were $4.7 billion (4.5 percent) higher than the first quarter of 2016, primarily due to purchases of U.S. Treasury securities to support liquidity management, partially offset by a reduction in U.S. government agency-backed securities.

Average total loans were $10.9 billion (4.1 percent) higher in the first quarter of 2017 than the first quarter of 2016, due to growth in commercial loans (4.4 percent), residential mortgages (6.8 percent), other retail loans (5.3 percent), commercial real estate loans (1.8 percent) and credit card loans (3.0 percent). The increases were driven by higher demand for loans from new and existing customers. These increases were partially offset by a decline in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation ("FDIC") (17.3 percent), a run-off portfolio. Average loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC ("covered" loans) decreased to $3.7 billion in the first quarter of 2017, compared with $4.5 billion in the same period of 2016.

Average total deposits for the first quarter of 2017 were $32.6 billion (11.0 percent) higher than the first quarter of 2016. Average noninterest-bearing deposits increased $2.2 billion (2.8 percent) over the prior year, mainly in Consumer and Small Business Banking and Wealth Management and Securities Services. Average total savings deposits were $33.4 billion (18.2 percent) higher, the result of growth across all business lines. Average time deposits were $3.0 billion (9.0 percent) lower in the first quarter of 2017, compared with the same period of 2016. The decrease was largely related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

U.S. Bancorp 3
Table of Contents

 Table 2  Noninterest Income

Three Months Ended

March 31,

(Dollars in Millions) 2017 2016 Percent
Change

Credit and debit card revenue

$ 292 $ 266 9.8

Corporate payment products revenue

179 170 5.3

Merchant processing services

378 373 1.3

ATM processing services

85 80 6.3

Trust and investment management fees

368 339 8.6

Deposit service charges

177 168 5.4

Treasury management fees

153 142 7.7

Commercial products revenue

207 197 5.1

Mortgage banking revenue

207 187 10.7

Investment products fees

40 40

Securities gains (losses), net

29 3 *

Other

214 184 16.3

Total noninterest income

$ 2,329 $ 2,149 8.4

* Not meaningful.

Provision for Credit Losses The provision for credit losses for the first quarter of 2017 was $345 million, an increase of $15 million (4.5 percent) over the first quarter of 2016. The provision for credit losses was $10 million higher than net-charge-offs in the first quarter of 2017, compared with $15 million higher than net charge-offs in the first quarter of 2016. The increase in the allowance for credit losses in the first quarter of 2017 was primarily driven by loan portfolio growth. Net charge-offs increased $20 million (6.3 percent) in the first quarter of 2017, compared with the same period of the prior year, primarily due to higher credit card loan and other retail loan net charge-offs, partially offset by lower net charge-offs related to commercial loans and residential mortgages. Refer to "Corporate Risk Profile" for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income  Noninterest income in the first quarter of 2017 was $2.3 billion, an increase of $180 million (8.4 percent), compared with the first quarter of 2016. The increase from a year ago was driven by increases in payment services revenue, trust and investment management fees, mortgage banking and other revenue. Payment services revenue was higher principally due to an increase in credit and debit card revenue of $26 million (9.8 percent), reflecting higher sales volumes. Merchant processing services revenue increased $5 million (1.3 percent). Adjusted for the approximate $5 million impact of foreign currency rate changes, the increase would have been approximately 2.7 percent. Trust and investment management fees increased $29 million (8.6 percent), primarily due to improved market conditions and account growth, along with lower money market fee waivers. Mortgage banking revenue increased $20 million (10.7 percent) mainly due to the valuation of mortgage servicing rights ("MSRs"), net of hedging activities. Other income increased $30 million (16.3 percent) compared with the first quarter of 2016, primarily due to higher equity investment income in the first quarter of 2017.

Noninterest Expense  Noninterest expense in the first quarter of 2017 was $2.9 billion, an increase of $195 million (7.1 percent), compared with the first quarter of 2016. The increase from a year ago was primarily due to higher compensation expense, employee benefits expense, marketing and business development expense and other expense. Compensation expense increased $142 million (11.4 percent), principally due to the impact of hiring to support business growth and compliance programs, merit increases and higher variable compensation. Employee benefits expense increased $14 million (4.7 percent), primarily driven by higher payroll taxes. Marketing and business development expense increased $13 million (16.9 percent) to support new business development. Other expense was $26 million (6.2 percent) higher, primarily reflecting the impact of the FDIC insurance surcharge, which began in the third quarter of 2016.

4 U.S. Bancorp
Table of Contents

 Table 3  Noninterest Expense

Three Months Ended

March 31,

(Dollars in Millions) 2017 2016 Percent
Change

Compensation

$ 1,391 $ 1,249 11.4

Employee benefits

314 300 4.7

Net occupancy and equipment

247 248 (.4

Professional services

96 98 (2.0

Marketing and business development

90 77 16.9

Technology and communications

235 233 .9

Postage, printing and supplies

81 79 2.5

Other intangibles

44 45 (2.2

Other

446 420 6.2

Total noninterest expense

$ 2,944 $ 2,749 7.1

Efficiency ratio (a)

55.6 54.6

(a) See Non-GAAP Financial Measures beginning on page 29.

Income Tax Expense  The provision for income taxes was $499 million (an effective rate of 25.1 percent) for the first quarter of 2017, compared with $504 million (an effective rate of 26.5 percent) for the first quarter of 2016. The decrease in the effective tax rate for the first quarter of 2017, compared with the first quarter of 2016, reflected the tax benefit associated with stock-based compensation under new accounting guidance, effective in the first quarter of 2017. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans  The Company's loan portfolio was $273.6 billion at March 31, 2017, compared with $273.2 billion at December 31, 2016, an increase of $370 million (0.1 percent). The increase was driven primarily by higher commercial loans, residential mortgages and other retail loans, partially offset by lower credit card loans, commercial real estate loans and covered loans.

Commercial loans increased $1.1 billion (1.2 percent) at March 31, 2017, compared with December 31, 2016, reflecting higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $992 million (1.7 percent), as origination activity exceeded customers paying down balances in the first quarter of 2017. Residential mortgages originated and placed in the Company's loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Other retail loans increased $102 million (0.2 percent) at March 31, 2017, compared with December 31, 2016, primarily driven by higher retail leasing and installment loans, partially offset by decreases in home equity loans, student loans and revolving credit balances.

Credit card loans decreased $1.4 billion (6.3 percent) at March 31, 2017, compared with December 31, 2016, primarily the result of customers seasonally paying down balances.

Commercial real estate loans decreased $266 million (0.6 percent) at March 31, 2017, compared with December 31, 2016, primarily the result of customers paying down balances.

The Company generally retains portfolio loans through maturity; however, the Company's intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company's intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.

Loans Held for Sale  Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $2.7 billion at March 31, 2017, compared with $4.8 billion at December 31, 2016. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in the first quarter of 2017. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises ("GSEs").

Investment Securities  Investment securities totaled $110.4 billion at March 31, 2017, compared with $109.3 billion at December 31, 2016. The $1.1 billion (1.1 percent) increase was primarily due to $1.1 billion of net investment purchases.

U.S. Bancorp 5
Table of Contents

 Table 4  Investment Securities

Available-for-Sale Held-to-Maturity

At March 31, 2017

(Dollars in Millions)

Amortized
Cost
Fair Value Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (e)
Amortized
Cost
Fair Value Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (e)

U.S. Treasury and Agencies

Maturing in one year or less

$ 4,503 $ 4,500 .5 .84 $ 350 $ 350 .3 1.00

Maturing after one year through five years

10,730 10,638 2.8 1.25 705 711 2.4 1.78

Maturing after five years through ten years

4,075 4,014 5.9 1.90 4,521 4,416 6.5 1.82

Maturing after ten years

1 1 10.4 4.15

Total

$ 19,309 $ 19,153 2.9 1.29 $ 5,576 $ 5,477 5.6 1.76

Mortgage-Backed Securities (a)

Maturing in one year or less

$ 144 $ 149 .7 4.19 $ 221 $ 223 .6 2.93

Maturing after one year through five years

19,242 19,212 4.2 2.10 25,002 24,828 3.8 2.08

Maturing after five years through ten years

20,931 20,584 5.8 1.94 12,313 12,087 5.7 2.04

Maturing after ten years

2,189 2,195 12.1 1.89 239 240 11.4 1.80

Total

$ 42,506 $ 42,140 5.4 2.02 $ 37,775 $ 37,378 4.4 2.07

Asset-Backed Securities (a)

Maturing in one year or less

$ $ $ $ 1 .8 1.88

Maturing after one year through five years

351 356 3.0 4.33 5 6 2.6 1.60

Maturing after five years through ten years

85 87 5.7 2.64 3 4 6.8 1.75

Maturing after ten years

5 17.1 1.61

Total

$ 436 $ 443 3.5 4.00 $ 8 $ 16 4.3 1.67

Obligations of State and Political
Subdivisions (b) (c)

Maturing in one year or less

$ 1,275 $ 1,287 .3 7.11 $ $ .1 8.21

Maturing after one year through five years

476 501 3.0 6.23 2.2 8.17

Maturing after five years through ten years

2,246 2,218 8.5 5.41 6 7 8.6 3.28

Maturing after ten years

1,356 1,250 19.0 5.07

Total

$ 5,353 $ 5,256 8.7 5.80 $ 6 $ 7 8.2 3.55

Other Debt Securities

Maturing in one year or less

$ $ $ 6 $ 6 .2 2.10

Maturing after one year through five years

22 22 3.3 1.90

Maturing after five years through ten years

Maturing after ten years

Total

$ $ $ 28 $ 28 2.6 1.94

Other Investments

$ 30 $ 39 $ $

Total investment securities (d)

$ 67,634 $ 67,031 4.9 2.12 $ 43,393 $ 42,906 4.6 2.03

(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c) Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.
(d) The weighted-average maturity of the available-for-sale investment securities was 5.1 years at December 31, 2016, with a corresponding weighted-average yield of 2.06 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.6 years at December 31, 2016, with a corresponding weighted-average yield of 1.93 percent.
(e) Weighted-average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. Weighted-average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

March 31, 2017 December 31, 2016
(Dollars in Millions) Amortized
Cost
Percent
of Total
Amortized
Cost
Percent
of Total

U.S. Treasury and agencies

$ 24,885 22.4 $ 22,560 20.5

Mortgage-backed securities

80,281 72.3 81,698 74.3

Asset-backed securities

444 .4 483 .4

Obligations of state and political subdivisions

5,359 4.8 5,173 4.7

Other debt securities and investments

58 .1 62 .1

Total investment securities

$ 111,027 100.0 $ 109,976 100.0

6 U.S. Bancorp
Table of Contents

The Company's available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At March 31, 2017, the Company's net unrealized losses on available-for-sale securities were $603 million, compared with $701 million at December 31, 2016. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of U.S. Treasury, U.S. government agency-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $903 million at March 31, 2017, compared with $1.0 billion at December 31, 2016. At March 31, 2017, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

Refer to Notes 3 and 14 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits  Total deposits were $336.9 billion at March 31, 2017, compared with $334.6 billion at December 31, 2016, the result of increases in total savings deposits and time deposits, partially offset by a decrease in noninterest-bearing deposits. Savings account balances increased $1.8 billion (4.4 percent), primarily due to higher Consumer and Small Business Banking balances. Interest checking balances increased $1.2 billion (1.9 percent) primarily due to higher Consumer and Small Business Banking, and Wholesale Banking and Commercial Real Estate balances, partially offset by lower corporate trust and broker-dealer balances. Money market deposit balances decreased $1.0 billion (0.9 percent) at March 31, 2017, compared with December 31, 2016, primarily due to lower Wholesale Banking and Commercial Real Estate balances, partially offset by higher Wealth Management and Securities Services balances. Time deposits increased $1.1 billion (3.6 percent) at March 31, 2017, compared with December 31, 2016, driven by an increase in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics, partially offset by lower Consumer and Small Business Banking balances driven by maturities. Noninterest-bearing deposits decreased $875 million (1.0 percent) at March 31, 2017, compared with December 31, 2016, primarily due to lower Wholesale Banking and Commercial Real Estate, and Consumer and Small Business Banking balances, partially offset by higher Wealth Management and Securities Services balances.

Borrowings  The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $12.2 billion at March 31, 2017, compared with $14.0 billion at December 31, 2016. The $1.8 billion (12.7 percent) decrease in short-term borrowings was primarily due to lower commercial paper balances, partially offset by higher other short-term borrowings balances. Long-term debt was $35.9 billion at March 31, 2017, compared with $33.3 billion at December 31, 2016. The $2.6 billion (7.9 percent) increase was primarily due to the issuances of $1.6 billion of bank notes and $1.5 billion of medium-term notes, partially offset by a $402 million decrease in Federal Home Loan Bank ("FHLB") advances. Refer to the "Liquidity Risk Management" section for discussion of liquidity management of the Company.

U.S. Bancorp 7
Table of Contents

CORPORATE RISK PROFILE

Overview Managing risks is an essential part of successfully operating a financial services company. The Company's Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.

The Executive Risk Committee ("ERC"), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputational risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.

The Company's most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale ("MLHFS"), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk also arises in situations where the laws or rules governing certain Company products or activities of the Company's customers may be ambiguous or untested. Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. Reputational risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company's competitiveness by affecting its ability to establish new relationships, offer new services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for a detailed discussion of these factors.

The Company's Board and management-level governance committees are supported by a "three lines of defense" model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer's organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company's governance, risk management, and control processes.

Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company's risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern, and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company's performance relative to the risk appetite statements and the associated risk limits, including:

Qualitative considerations, such as the macroeconomic environment, regulatory and compliance changes, litigation developments, and technology and cybersecurity;

8 U.S. Bancorp
Table of Contents

Capital ratios and projections, including regulatory measures and stressed scenarios;
Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits;
Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk;
Liquidity risk, including funding projections under various stressed scenarios;
Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security, or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures; and
Reputational and strategic risk considerations, impacts and responses.

Credit Risk Management  The Company's strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings. The Risk Management Committee oversees the Company's credit risk management process.

In addition, credit quality ratings as defined by the Company, are an important part of the Company's overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company's rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings ("TDRs"), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company's internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and second mortgage portfolios, which allows the Company to compute estimated loan-to-value ("LTV") ratios reflecting current market conditions. These individual refreshed LTV ratios are considered in the determination of the appropriate allowance for credit losses. However, the underwriting criteria the Company employs consider the relevant income and credit characteristics of the borrower, such that the collateral is not the primary source of repayment. Refer to Note 4 in the Notes to Consolidated Financial Statements for further discussion of the Company's loan portfolios including internal credit quality ratings. In addition, refer to "Management's Discussion and Analysis - Credit Risk Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers a broad array of lending products. The Company categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company's three loan portfolio segments are commercial lending, consumer lending and covered loans.

The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, non-profit and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower's business, purpose of the loan, repayment source, borrower's debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.

U.S. Bancorp 9
Table of Contents

Included within the commercial lending segment are energy loans, which represented 0.9 percent of the Company's total loans outstanding at March 31, 2017. The effects of low energy prices beginning in late 2014, have resulted in higher than historical levels of criticized commitments and nonperforming assets at March 31, 2017 and December 31, 2016.

The following table provides a summary of the Company's energy loans:

(Dollars in Millions) March 31,
2017
December 31,
2016

Loans outstanding

$ 2,418 $ 2,642

Total commitments

10,704 10,955

Total criticized commitments

2,836 2,847

Nonperforming assets

182 257

Allowance for credit losses as a percentage of loans outstanding

7.8 7.8

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At March 31, 2017, substantially all of the Company's home equity lines were in the draw period. Approximately $1.2 billion, or 8 percent, of the outstanding home equity line balances at March 31, 2017, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers' capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

The covered loan segment represents loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC that greatly reduce the risk of future credit losses to the Company. Key risk characteristics for covered segment loans are consistent with the segment they would otherwise be included in had the loss share coverage not been in place, but consider the indemnification provided by the FDIC.

The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans. The covered loan segment consists of only one class.

The Company's consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, on-line banking, indirect lending, portfolio acquisitions, correspondent banks and loan brokers. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.

Residential mortgage originations are generally limited to prime borrowers and are performed through the Company's branches, loan production offices, on-line services and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company's portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.

The Company estimates updated LTV information on its outstanding residential mortgages quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan's outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined loan-to-value ("CLTV") is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have a LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.

10 U.S. Bancorp
Table of Contents

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV and borrower type at March 31, 2017:

Residential Mortgages

(Dollars in Millions)

Interest
Only
Amortizing Total Percent
of Total

Loan-to-Value

Less than or equal to 80%

$ 1,778 $ 46,978 $ 48,756 83.7

Over 80% through 90%

29 3,903 3,932 6.7

Over 90% through 100%

18 991 1,009 1.7

Over 100%

9 788 797 1.4

No LTV available

2 61 63 .1

Loans purchased from GNMA mortgage pools (a)

3,709 3,709 6.4

Total

$ 1,836 $ 56,430 $ 58,266 100.0

Borrower Type

Prime borrowers

$ 1,835 $ 51,360 $ 53,195 91.3

Sub-prime borrowers

913 913 1.5

Other borrowers

1 448 449 .8

Loans purchased from GNMA mortgage pools (a)

3,709 3,709 6.4

Total

$ 1,836 $ 56,430 $ 58,266 100.0

(a) Represents loans purchased from Government National Mortgage Association ("GNMA") mortgage pools whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

Home Equity and Second Mortgages

(Dollars in Millions)

Lines Loans Total Percent
of Total

Loan-to-Value

Less than or equal to 80%

$ 11,125 $ 567 $ 11,692 72.3

Over 80% through 90%

2,300 667 2,967 18.3

Over 90% through 100%

771 146 917 5.7

Over 100%

429 35 464 2.9

No LTV/CLTV available

107 16 123 .8

Total

$ 14,732 $ 1,431 $ 16,163 100.0

Borrower Type

Prime borrowers

$ 14,404 $ 1,332 $ 15,736 97.4

Sub-prime borrowers

57 88 145 .9

Other borrowers

271 11 282 1.7

Total

$ 14,732 $ 1,431 $ 16,163 100.0

The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.2 percent of the Company's total assets at March 31, 2017 and December 31, 2016. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company's underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company's program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

Home equity and second mortgages were $16.2 billion at March 31, 2017, compared with $16.4 billion at December 31, 2016, and included $4.8 billion of home equity lines in a first lien position and $11.4 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at March 31, 2017, included approximately $4.7 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.7 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company's junior lien positions at March 31, 2017:

Junior Liens Behind
(Dollars in Millions)
Company Owned
or Serviced

First Lien

Third Party
First Lien
Total

Total

$ 4,743 $ 6,671 $ 11,414

Percent 30-89 days past due

.26 .36 .32

Percent 90 days or more past due

.07 .07 .07

Weighted-average CLTV

74 70 72

Weighted-average credit score

774 768 770

See the "Analysis and Determination of the Allowance for Credit Losses" section for additional information on how the Company determines the allowance for credit losses for loans in a junior lien position.

U.S. Bancorp 11
Table of Contents

 Table 5  Delinquent Loan Ratios as a Percent of Ending Loan Balances

90 days or more past due excluding nonperforming loans March 31,
2017
December 31,
2016

Commercial

Commercial

.06 .06

Lease financing

Total commercial

.06 .06

Commercial Real Estate

Commercial mortgages

.01

Construction and development

.03 .05

Total commercial real estate

.01 .02

Residential Mortgages (a)

.24 .27

Credit Card

1.23 1.16

Other Retail

Retail leasing

.01 .02

Home equity and second mortgages

.24 .25

Other

.12 .13

Total other retail (b)

.14 .15

Total loans, excluding covered loans

.19 .20

Covered Loans

5.34 5.53

Total loans

.26 .28
90 days or more past due including nonperforming loans March 31,
2017
December 31,
2016

Commercial

.52 .57

Commercial real estate

.27 .31

Residential mortgages (a)

1.23 1.31

Credit card

1.24 1.18

Other retail (b)

.43 .45

Total loans, excluding covered loans

.67 .71

Covered loans

5.53 5.68

Total loans

.73 .78

(a) Delinquent loan ratios exclude $2.4 billion at March 31, 2017, and $2.5 billion at December 31, 2016, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 5.39 percent at March 31, 2017, and 5.73 percent at December 31, 2016.
(b) Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including these loans, the ratio of total other retail loans 90 days or more past due including all nonperforming loans was .59 percent at March 31, 2017, and .63 percent at December 31, 2016.

Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company's loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $718 million ($524 million excluding covered loans) at March 31, 2017, compared with $764 million ($552 million excluding covered loans) at December 31, 2016. These balances exclude loans purchased from Government National Mortgage Association ("GNMA") mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, as well as student loans guaranteed by the federal government. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.26 percent (0.19 percent excluding covered loans) at March 31, 2017, compared with 0.28 percent (0.20 percent excluding covered loans) at December 31, 2016.

12 U.S. Bancorp
Table of Contents

The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:

Amount As a Percent of Ending
Loan Balances
(Dollars in Millions) March 31,
2017
December 31,
2016
March 31,
2017
December 31,
2016

Residential Mortgages (a)

30-89 days

$ 120 $ 151 .21 .26

90 days or more

142 156 .24 .27

Nonperforming

575 595 .99 1.04

Total

$ 837 $ 902 1.44 1.57

Credit Card

30-89 days

$ 252 $ 284 1.24 1.31

90 days or more

251 253 1.23 1.16

Nonperforming

2 3 .01 .01

Total

$ 505 $ 540 2.48 2.48

Other Retail

Retail Leasing

30-89 days

$ 16 $ 18 .24 .28

90 days or more

1 1 .01 .02

Nonperforming

3 2 .04 .03

Total

$ 20 $ 21 .29 .33

Home Equity and Second Mortgages

30-89 days

$ 55 $ 60 .33 .37

90 days or more

38 41 .24 .25

Nonperforming

127 128 .79 .78

Total

$ 220 $ 229 1.36 1.40

Other (b)

30-89 days

$ 177 $ 206 .56 .66

90 days or more

36 41 .12 .13

Nonperforming

27 27 .09 .09

Total

$ 240 $ 274 .77 .88

(a) Excludes $221 million of loans 30-89 days past due and $2.4 billion of loans 90 days or more past due at March 31, 2017, purchased from GNMA mortgage pools that continue to accrue interest, compared with $273 million and $2.5 billion at December 31, 2016, respectively.
(b) Includes revolving credit, installment, automobile and student loans.

The following table provides summary delinquency information for covered loans:

Amount As a Percent of Ending
Loan Balances
(Dollars in Millions) March 31,
2017
December 31,
2016
March 31,
2017
December 31,
2016

30-89 days

$ 45 $ 55 1.24 1.43

90 days or more

194 212 5.34 5.53

Nonperforming

7 6 .19 .16

Total

$ 246 $ 273 6.77 7.12

Restructured Loans  In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered.

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. Performing TDRs were $4.2 billion at March 31, 2017 and December 31, 2016. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties, including those acquired through FDIC-assisted acquisitions. Many of the Company's TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company's loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its

U.S. Bancorp 13
Table of Contents

own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers modification solutions over a specified time period, generally up to 60 months.

In accordance with regulatory guidance, the Company considers secured consumer loans that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs. If the loan amount exceeds the collateral value, the loan is charged down to collateral value and the remaining amount is reported as nonperforming.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company's accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with modifications on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.

The following table provides a summary of TDRs by loan class, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets:

As a Percent of Performing TDRs

At March 31, 2017

(Dollars in Millions)

Performing
TDRs
30-89 Days
Past Due
90 Days or More
Past Due
Nonperforming
TDRs
Total
TDRs

Commercial

$ 345 3.5 1.5 $ 290 (a)  $ 635

Commercial real estate

153 2.0 18 (b)  171

Residential mortgages

1,631 2.3 3.6 401 2,032 (d) 

Credit card

227 10.5 7.4 2 (c)  229

Other retail

122 3.7 4.7 47 (c)  169 (e) 

TDRs, excluding GNMA and covered loans

2,478 3.3 3.5 758 3,236

Loans purchased from GNMA mortgage pools (g)

1,717 1,717 (f) 

Covered loans

29 1.3 8.1 5 34

Total

$ 4,224 1.9 2.1 $ 763 $ 4,987

(a) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months) and small business credit cards with a modified rate equal to 0 percent.
(b) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months).
(c) Primarily represents loans with a modified rate equal to 0 percent.
(d) Includes $346 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $66 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e) Includes $83 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $6 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(f) Includes $279 million of Federal Housing Administration and United States Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $635 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(g) Approximately 3.8 percent and 67.0 percent of the total TDR loans purchased from GNMA mortgage pools are 30-89 days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

14 U.S. Bancorp
Table of Contents

Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed. Short-term modified loans were not material at March 31, 2017.

Nonperforming Assets  The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and not accruing interest, restructured loans that have not met the performance period required to return to accrual status, other real estate owned ("OREO") and other nonperforming assets owned by the Company. Nonperforming assets are generally either originated by the Company or acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to the Company. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

At March 31, 2017, total nonperforming assets were $1.5 billion, compared with $1.6 billion at December 31, 2016. The $108 million (6.7 percent) decrease in nonperforming assets was driven by improvements in commercial loans, commercial real estate, residential mortgages and other real estate. Nonperforming covered assets were $29 million at March 31, 2017, compared with $32 million at December 31, 2016. The ratio of total nonperforming assets to total loans and other real estate was 0.55 percent at March 31, 2017, compared with 0.59 percent at December 31, 2016.

OREO, excluding covered assets, was $155 million at March 31, 2017, compared with $186 million at December 31, 2016, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

The following table provides an analysis of OREO, excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:

Amount As a Percent of Ending
Loan Balances
(Dollars in Millions) March 31,
2017
December 31,
2016
March 31,
2017
December 31,
2016

Residential

Illinois

$ 12 $ 15 .28 .35

Minnesota

11 12 .18 .19

New York

8 9 1.04 1.16

Ohio

8 9 .28 .31

Washington

8 8 .18 .19

All other states

99 122 .18 .22

Total residential

146 175 .20 .24

Commercial

California

4 4 .02 .02

Tennessee

1 1 .04 .04

Idaho

1 .07

New Jersey

1 1 .04 .04

New Mexico

All other states

2 5

Total  commercial

9 11 .01 .01

Total

$ 155 $ 186 .06 .07

U.S. Bancorp 15
Table of Contents

 Table 6  Nonperforming Assets (a)

(Dollars in Millions) March 31,
2017
December 31,
2016

Commercial

Commercial

$ 397 $ 443

Lease financing

42 40

Total commercial

439 483

Commercial Real Estate

Commercial mortgages

74 87

Construction and development

36 37

Total commercial real estate

110 124

Residential Mortgages (b)

575 595

Credit Card

2 3

Other Retail

Retail leasing

3 2

Home equity and second mortgages

127 128

Other

27 27

Total other retail

157 157

Total nonperforming loans, excluding covered loans

1,283 1,362

Covered Loans

7 6

Total nonperforming loans

1,290 1,368

Other Real Estate (c)(d)

155 186

Covered Other Real Estate (d)

22 26

Other Assets

28 23

Total nonperforming assets

$ 1,495 $ 1,603

Total nonperforming assets, excluding covered assets

$ 1,466 $ 1,571

Excluding covered assets

Accruing loans 90 days or more past due (b)

$ 524 $ 552

Nonperforming loans to total loans

.48 .51

Nonperforming assets to total loans plus other real estate (c)

.54 .58

Including covered assets

Accruing loans 90 days or more past due (b)

$ 718 $ 764

Nonperforming loans to total loans

.47 .50

Nonperforming assets to total loans plus other real estate (c)

.55 .59

Changes in Nonperforming Assets

(Dollars in Millions) Commercial and
Commercial
Real Estate
Residential
Mortgages,
Credit Card and
Other Retail
Covered
Assets
Total

Balance December 31, 2016

$ 623 $ 948 $ 32 $ 1,603

Additions to nonperforming assets

New nonaccrual loans and foreclosed properties

138 106 3 247

Advances on loans

1 1

Total additions

139 106 3 248

Reductions in nonperforming assets

Paydowns, payoffs

(120 (48 (1 (169

Net sales

(7 (54 (5 (66

Return to performing status

(3 (40 (43

Charge-offs (e)

(66 (12 (78

Total reductions

(196 (154 (6 (356

Net additions to (reductions in) nonperforming assets

(57 (48 (3 (108

Balance March 31, 2017

$ 566 $ 900 $ 29 $ 1,495

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $2.4 billion and $2.5 billion at March 31, 2017, and December 31, 2016, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
(c) Foreclosed GNMA loans of $360 million and $373 million at March 31, 2017, and December 31, 2016, respectively, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
(d) Includes equity investments in entities whose principal assets are other real estate owned.
(e) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.

16 U.S. Bancorp
Table of Contents

 Table 7  Net Charge-offs as a Percent of Average Loans Outstanding

Three Months Ended
March 31,
2017 2016

Commercial

Commercial

.33 .37

Lease financing

.30 .38

Total commercial

.32 .37

Commercial Real Estate

Commercial mortgages

(.01 (.03

Construction and development

(.03 (.11

Total commercial real estate

(.02 (.05

Residential Mortgages

.08 .14

Credit Card

3.70 3.26

Other Retail

Retail leasing

.19 .08

Home equity and second mortgages

(.02 .05

Other

.76 .69

Total other retail

.45 .43

Total loans, excluding covered loans

.50 .49

Covered Loans

Total loans

.50 .48

Analysis of Loan Net Charge-Offs  Total loan net charge-offs were $335 million for the first quarter of 2017, compared with $315 million for the first quarter of 2016. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the first quarter of 2017 was 0.50 percent, compared with 0.48 percent for the first quarter of 2016. The increase in net charge-offs for the first quarter of 2017, compared with the first quarter of 2016, reflected higher credit card and other retail loan net charge-offs, partially offset by lower net charge-offs related to commercial loans and residential mortgages.

Commercial and commercial real estate loan net charge-offs for the first quarter of 2017 were $73 million (0.22 percent of average loans outstanding on an annualized basis), compared with $78 million (0.24 percent of average loans outstanding on an annualized basis) for the first quarter of 2016.

Residential mortgage loan net charge-offs for the first quarter of 2017 were $12 million (0.08 percent of average loans outstanding on an annualized basis), compared with $19 million (0.14 percent of average loans outstanding on an annualized basis) for the first quarter of 2016. Credit card loan net charge-offs for the first quarter of 2017 were $190 million (3.70 percent of average loans outstanding on an annualized basis), compared with $164 million (3.26 percent of average loans outstanding on an annualized basis) for the first quarter of 2016. Other retail loan net charge-offs for the first quarter of 2017 were $60 million (0.45 percent of average loans outstanding on an annualized basis), compared with $54 million (0.43 percent of average loans outstanding on an annualized basis) for the first quarter of 2016.

Analysis and Determination of the Allowance for Credit Losses  The allowance for credit losses reserves for probable and estimable losses incurred in the Company's loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 16-year period of historical loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical timeframe is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on

U.S. Bancorp 17
Table of Contents

a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends.

The allowance recorded for TDR loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, portfolio growth and historical losses, adjusted for current trends. Credit card and other retail loans 90 days or more past due are generally not placed on nonaccrual status because of the relatively short period of time to charge-off and, therefore, are excluded from nonperforming loans and measures that include nonperforming loans as part of the calculation.

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At March 31, 2017, the Company serviced the first lien on 42 percent of the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the first liens that are serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $323 million or 2.0 percent of the total home equity portfolio at March 31, 2017, represented non-delinquent junior liens where the first lien was delinquent or modified.

The Company uses historical loss experience on the loans and lines in a junior lien position where the first lien is serviced by the Company, or can be identified in credit bureau data, to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1.1 percent annually), while the long-term average loss rate on loans that default has been approximately 90 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information to qualitatively supplement its loss estimation methods. Credit score distributions for the portfolio are monitored monthly and any changes in the distribution are one of the factors considered in assessing the Company's loss estimates. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment and with residential lines and loans that have a balloon payoff provision.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans, and represents any decreases in expected cash flows on those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, the evaluation of the appropriate allowance for credit losses for purchased non-impaired loans acquired after January 1, 2009, in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for credit losses is recorded at the purchase date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance, net of any expected reimbursement under any loss sharing agreements with the FDIC, exceeds any remaining credit discounts.

The evaluation of the appropriate allowance for credit losses for purchased impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and, therefore, no allowance for credit losses is recorded at the purchase date.

Subsequent to the purchase date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for credit losses with the related provision for credit losses reduced for the amount reimbursable by the FDIC, where applicable. If the expected cash flows on the purchased loans increase such that a previously recorded impairment allowance can be

18 U.S. Bancorp
Table of Contents

reversed, the Company records a reduction in the allowance with a related reduction in losses reimbursable by the FDIC, where applicable. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans and resulting decreases in expected cash flows of the FDIC indemnification assets are amortized over the shorter of the remaining contractual term of the indemnification agreements or the remaining life of the loans.

The Company's methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards and other relevant business practices; results of internal review; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company's allowance for credit losses for each of the above loan segments.

Refer to "Management's Discussion and Analysis - Analysis of the Allowance for Credit Losses" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on the analysis and determination of the allowance for credit losses.

At March 31, 2017, the allowance for credit losses was $4.4 billion (1.60 percent of period-end loans), compared with an allowance of $4.4 billion (1.59 percent of period-end loans) at December 31, 2016. The ratio of the allowance for credit losses to nonperforming loans was 338 percent at March 31, 2017, compared with 318 percent at December 31, 2016. The ratio of the allowance for credit losses to annualized loan net charge-offs was 321 percent at March 31, 2017, compared with 343 percent of full year 2016 net charge-offs at December 31, 2016.

U.S. Bancorp 19
Table of Contents

 Table 8  Summary of Allowance for Credit Losses

Three Months Ended
March 31,
(Dollars in Millions)         2017         2016

Balance at beginning of period

$ 4,357 $ 4,306

Charge-Offs

Commercial

Commercial

90 104

Lease financing

6 7

Total commercial

96 111

Commercial real estate

Commercial mortgages

2 1

Construction and development

1 2

Total commercial real estate

3 3

Residential mortgages

17 23

Credit card

212 188

Other retail

Retail leasing

4 2

Home equity and second mortgages

8 9

Other

77 69

Total other retail

89 80

Covered loans (a)

Total charge-offs

417 405

Recoveries

Commercial

Commercial

19 26

Lease financing

2 2

Total commercial

21 28

Commercial real estate

Commercial mortgages

3 3

Construction and development

2 5

Total commercial real estate

5 8

Residential mortgages

5 4

Credit card

22 24

Other retail

Retail leasing

1 1

Home equity and second mortgages

9 7

Other

19 18

Total other retail

29 26

Covered loans (a)

Total recoveries

82 90

Net Charge-Offs

Commercial

Commercial

71 78

Lease financing

4 5

Total commercial

75 83

Commercial real estate

Commercial mortgages

(1 (2

Construction and development

(1 (3

Total commercial real estate

(2 (5

Residential mortgages

12 19

Credit card

190 164

Other retail

Retail leasing

3 1

Home equity and second mortgages

(1 2

Other

58 51

Total other retail

60 54

Covered loans (a)

Total net charge-offs

335 315

Provision for credit losses

345 330

Other changes (b)

(1 (1

Balance at end of period (c)

$ 4,366 $ 4,320

Components

Allowance for loan losses

$ 3,816 $ 3,853

Liability for unfunded credit commitments

550 467

Total allowance for credit losses

$ 4,366 $ 4,320

Allowance for Credit Losses as a Percentage of

Period-end loans, excluding covered loans

1.61 1.65

Nonperforming loans, excluding covered loans

338 302

Nonperforming and accruing loans 90 days or more past due, excluding covered loans

240 220

Nonperforming assets, excluding covered assets

296 255

Annualized net charge-offs, excluding covered loans

319 338

Period-end loans

1.60 1.63

Nonperforming loans

338 303

Nonperforming and accruing loans 90 days or more past due

217 194

Nonperforming assets

292 251

Annualized net charge-offs

321 341

(a) Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.
(b) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.
(c) At March 31, 2017 and 2016, $1.6 billion of the total allowance for credit losses related to incurred losses on credit card and other retail loans.

20 U.S. Bancorp
Table of Contents

Residual Value Risk Management  The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of March 31, 2017, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2016. Refer to "Management's Discussion and Analysis - Residual Value Risk Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on residual value risk management.

Operational Risk Management  Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company's objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom they do business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to "Management's Discussion and Analysis - Operational Risk Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on operational risk management.

Compliance Risk Management  The Company may suffer legal or regulatory sanctions, material financial loss, or damage to reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protections and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues. Refer to "Management's Discussion and Analysis - Compliance Risk Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on compliance risk management.

Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and the safety and soundness of an entity. To manage the impact on net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset and Liability Management Committee ("ALCO") and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk.

Net Interest Income Simulation Analysis  Management estimates the impact on net interest income of changes in market interest rates under a number of scenarios, including gradual shifts, immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The Company has established policy limits within which it manages the overall interest rate risk profile, and at March 31, 2017 and December 31, 2016, the Company was within those limits. Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes assumptions based on historical information and expected behaviors, actual outcomes could vary significantly. For example, if deposit outflows are more limited ("stable") than the assumptions the Company used in preparing Table 9, the projected impact to net interest income would increase to 2.00 percent in the "Up 50 basis point ("bps")" and 3.78 percent in the "Up 200 bps" scenarios. Refer to "Management's Discussion and Analysis - Net Interest Income Simulation Analysis" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on net interest income simulation analysis.

Market Value of Equity Modeling  The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company's assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. A 200 bps increase would have resulted in a 2.0 percent decrease in the market value of equity at March 31, 2017, compared with a 1.9 percent decrease

U.S. Bancorp 21
Table of Contents

 Table 9  Sensitivity of Net Interest Income

March 31, 2017 December 31, 2016
Down 50 bps
Immediate
Up 50 bps
Immediate
Down 200 bps
Gradual
Up 200 bps
Gradual
Down 50 bps
Immediate
Up 50 bps
Immediate
Down 200 bps
Gradual
Up 200 bps
Gradual

Net interest income

(2.55 )%  1.37 * 1.73 (2.82 )%  1.52 * 1.82

* Given the level of interest rates, downward rate scenario is not computed.

at December 31, 2016. A 200 bps decrease, where possible given current rates, would have resulted in a 8.6 percent decrease in the market value of equity at March 31, 2017, compared with an 8.1 percent decrease at December 31, 2016. Refer to "Management's Discussion and Analysis - Market Value of Equity Modeling" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on market value of equity modeling.

Use of Derivatives to Manage Interest Rate and Other Risks  To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:

To convert fixed-rate debt from fixed-rate payments to floating-rate payments;
To convert the cash flows associated with floating-rate debt from floating-rate payments to fixed-rate payments;
To mitigate changes in value of the Company's unfunded mortgage loan commitments, funded MLHFS and MSRs;
To mitigate remeasurement volatility of foreign currency denominated balances; and
To mitigate the volatility of the Company's net investment in foreign operations driven by fluctuations in foreign currency exchange rates.

The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company does not utilize derivatives for speculative purposes.

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy to-be-announced securities ("TBAs"), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At March 31, 2017, the Company had $4.1 billion of forward commitments to sell, hedging $1.6 billion of MLHFS and $3.1 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.

Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible, by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps, interest rate forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk.

For additional information on derivatives and hedging activities, refer to Notes 12 and 13 in the Notes to Consolidated Financial Statements.

Market Risk Management  In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support

22 U.S. Bancorp
Table of Contents

customers' strategies to manage their own foreign currency, interest rate risk and funding activities. For purposes of its internal capital adequacy assessment process, the Company considers risk arising from its trading activities employing methodologies consistent with the requirements of regulatory rules for market risk. The Company's Market Risk Committee ("MRC"), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company's trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a Value at Risk ("VaR") approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its trading businesses measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect its corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year for its trading businesses. The Company monitors the effectiveness of its risk programs by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.

The average, high, low and period-end one-day VaR amounts for the Company's trading positions were as follows:

Three Months Ended March 31,

(Dollars in Millions)

2017 2016

Average

$ 1 $ 1

High

1 1

Low

1 1

Period-end

1 1

The Company did not experience any actual trading losses for its combined trading businesses that exceeded VaR during the three months ended March 31, 2017 and 2016. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous one-year look-back period is utilized that reflects a period of significant financial stress appropriate to the Company's trading portfolio. The period selected by the Company includes the significant market volatility of the last four months of 2008.

The average, high, low and period-end one-day Stressed VaR amounts for the Company's trading positions were as follows:

Three Months Ended March 31,

(Dollars in Millions)

2017 2016

Average

$ 4 $ 4

High

5 5

Low

3 3

Period-end

5 4

Valuations of positions in the client derivatives and foreign currency transaction businesses are based on discounted cash flow or other valuation techniques using market-based assumptions. These valuations are compared to third party quotes or other market prices to determine if there are significant variances. Significant variances are approved by the Company's market risk management department. Valuation of positions in the corporate bond trading, loan trading and municipal securities businesses are based on trader marks. These trader marks are evaluated against third party prices, with significant variances approved by the Company's risk management department.

The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. The Company monitors the effectiveness of the models through back-testing, updating the data and regular validations. A three-year look-back period is used to obtain past market data for the models.

The average, high and low VaR amounts for the residential MLHFS and related hedges and the MSRs and related hedges were as follows:

Three Months Ended March 31,

(Dollars in Millions)

2017 2016

Residential Mortgage Loans Held For Sale and Related Hedges

Average

$ $

High

1 2

Low

Mortgage Servicing Rights and Related Hedges

Average

$ 9 $ 7

High

10 8

Low

7 4

Liquidity Risk Management  The Company's liquidity risk management process is designed to identify, measure, and

U.S. Bancorp 23
Table of Contents

manage the Company's funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company's profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.

The Company's Board of Directors approves the Company's liquidity policy. The Risk Management Committee of the Company's Board of Directors oversees the Company's liquidity risk management process and approves the contingency funding plan. The ALCO reviews the Company's liquidity policy and guidelines, and regularly assesses the Company's ability to meet funding requirements arising from adverse company-specific or market events.

The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company's access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank's Discount Window. At March 31, 2017, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $101.9 billion, compared with $100.6 billion at December 31, 2016. Refer to Table 4 and "Balance Sheet Analysis" for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company's practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At March 31, 2017, the Company could have borrowed an additional $88.2 billion at the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company's diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company's reliance on the wholesale markets. Total deposits were $336.9 billion at March 31, 2017, compared with $334.6 billion at December 31, 2016. Refer to "Balance Sheet Analysis" for further information on the Company's deposits.

Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $35.9 billion at March 31, 2017, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $12.2 billion at March 31, 2017, and supplement the Company's other funding sources. Refer to "Balance Sheet Analysis" for further information on the Company's long-term debt and short-term borrowings.

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company's liquidity. The Company maintains sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included and 24 months assuming dividends were reduced to zero. The parent company currently has available funds considerably greater than the amounts required to satisfy these conditions.

At March 31, 2017, parent company long-term debt outstanding was $14.5 billion, compared with $13.0 billion at December 31, 2016. The increase was primarily due to the issuance of $1.5 billion of medium-term notes. As of March 31, 2017, there was $1.3 billion of parent company debt scheduled to mature in the remainder of 2017.

The Company is subject to a regulatory Liquidity Coverage Ratio ("LCR") requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At March 31, 2017, the Company was compliant with this requirement.

Refer to "Management's Discussion and Analysis - Liquidity Risk Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on liquidity risk management.

European Exposures The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At March 31, 2017, the Company had an aggregate amount on deposit with European banks of approximately $7.4 billion, predominately with the Central Bank of Ireland and Bank of England.

In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain

24 U.S. Bancorp
Table of Contents

derivative-related activities, and through a subsidiary, manages money market funds that hold certain investments in European sovereign debt. Any deterioration in economic conditions in Europe is unlikely to have a significant effect on the Company related to these activities.

Off-Balance Sheet Arrangements  Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. Refer to Note 15 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company has not utilized private label asset securitizations as a source of funding. Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information related to the Company's interests in variable interest entities.

Capital Management  The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company's capital adequacy being evaluated against the methodology that is most restrictive. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at March 31, 2017 and December 31, 2016. All regulatory ratios exceeded regulatory "well-capitalized" requirements.

Effective January 1, 2018, the Company will be subject to a regulatory Supplementary Leverage Ratio ("SLR") requirement for banks calculating capital adequacy using advanced approaches under Basel III. The SLR is defined as tier 1 capital divided by total leverage exposure, which includes both on- and off-balance sheet exposures. At March 31, 2017, the Company's SLR exceeded the applicable minimum SLR requirement.

Total U.S. Bancorp shareholders' equity was $47.8 billion at March 31, 2017, compared with $47.3 billion at December 31, 2016. The increase was primarily the result of corporate earnings, a preferred stock issuance and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss). This increase was partially offset by common share repurchases, dividends and the call of $1.1 billion of preferred stock, reflected in other liabilities at March 31, 2017. Issuance costs related to the preferred stock called by the Company reduced net income applicable to U.S. Bancorp common shareholders by $10 million in the first quarter of 2017.

The Company believes certain capital ratios in addition to statutory regulatory capital ratios are useful

 Table 10  Regulatory Capital Ratios

(Dollars in Millions) March 31,
2017
December 31,
2016

Basel III transitional standardized approach:

Common equity tier 1 capital

$ 33,847 $ 33,720

Tier 1 capital

39,374 39,421

Total risk-based capital

47,279 47,355

Risk-weighted assets

356,373 358,237

Common equity tier 1 capital as a percent of risk-weighted assets

9.5 9.4

Tier 1 capital as a percent of risk-weighted assets

11.0 11.0

Total risk-based capital as a percent of risk-weighted assets

13.3 13.2

Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)

9.1 9.0

Basel III transitional advanced approaches:

Common equity tier 1 capital

$ 33,847 $ 33,720

Tier 1 capital

39,374 39,421

Total risk-based capital

44,304 44,264

Risk-weighted assets

285,963 277,141

Common equity tier 1 capital as a percent of risk-weighted assets

11.8 12.2

Tier 1 capital as a percent of risk-weighted assets

13.8 14.2

Total risk-based capital as a percent of risk-weighted assets

15.5 16.0

U.S. Bancorp 25
Table of Contents

in evaluating its capital adequacy. The Company's tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets calculated under the transitional standardized approach, was 7.6 percent and 9.4 percent, respectively, at March 31, 2017, compared with 7.5 percent and 9.2 percent, respectively, at December 31, 2016. The Company's common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach as if fully implemented was 9.2 percent at March 31, 2017, compared with 9.1 percent at December 31, 2016. The Company's common equity tier 1 capital to risk-weighted assets ratio using the Basel III advanced approaches as if fully implemented was 11.5 percent at March 31, 2017, compared with 11.7 percent at December 31, 2016.

On June 29, 2016, the Company announced its Board of Directors had approved an authorization to repurchase up to $2.6 billion of its common stock, from July 1, 2016 through June 30, 2017.

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the first quarter of 2017:

Period Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (a)
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Program
(In Millions)

January

5,349,756  (b)  $ 52.03 5,274,756 $ 1,018

February

4,137,128  (c)  54.35 4,087,128 795

March

1,986,368  (d)  54.11 1,911,368 692

Total

11,473,252  (e)  $ 53.23 11,273,252 $ 692

(a) All shares were purchased under the stock repurchase program announced on June 29, 2016.
(b) Includes 75,000 shares of common stock purchased, at an average price per share of $51.86, in open-market transactions by U.S. Bank National Association, the Company's banking subsidiary, in its capacity as trustee of the Company's Employee Retirement Savings Plan.
(c) Includes 50,000 shares of common stock purchased, at an average price per share of $53.03, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company's Employee Retirement Savings Plan.
(d) Includes 75,000 shares of common stock purchased, at an average price per share of $54.22, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company's Employee Retirement Savings Plan.
(e) Includes 200,000 shares of common stock purchased, at an average price per share of $53.04, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company's Employee Retirement Savings Plan.

Refer to "Management's Discussion and Analysis -Capital Management" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on capital management.

LINE OF BUSINESS FINANCIAL REVIEW

The Company's major lines of business are Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, Wealth Management and Securities Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.

Basis for Financial Presentation  Business line results are derived from the Company's business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the lines of business based on the related loan balances managed. Refer to "Management's Discussion and Analysis - Line of Business Financial Review" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion on the business lines' basis for financial presentation.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company's diverse customer base. During 2017, certain organization and methodology changes were made and, accordingly, 2016 results were restated and presented on a comparable basis.

Wholesale Banking and Commercial Real Estate Wholesale Banking and Commercial Real Estate offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Wholesale Banking and Commercial Real Estate contributed $259 million of the Company's net income in the first quarter of 2017, or an increase of $141 million compared with the first quarter of 2016. The increase was primarily due to a decrease in the provision for credit losses as well as an increase in net revenue, partially offset by an increase in noninterest expense.

Net revenue increased $93 million (12.7 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $58 million (11.0 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower spread on loans reflecting a competitive marketplace. Noninterest income increased $35 million (17.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher capital markets volume and higher foreign currency customer activity.

Noninterest expense increased $36 million (10.3 percent) in the first quarter of 2017, compared with the

26 U.S. Bancorp
Table of Contents

first quarter of 2016, primarily due to an increase in variable costs allocated to manage the business, including the impact of the FDIC surcharge, and higher variable compensation. The provision for credit losses decreased $165 million (82.1 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to the impacts of reserve build for energy sector downgrades in the prior year, along with lower net charge-offs in the current year.

Consumer and Small Business Banking  Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Small Business Banking contributed $295 million of the Company's net income in the first quarter of 2017, or a decrease of $59 million (16.7 percent) compared with the first quarter of 2016. The decrease was due to an increase in the provision for credit losses and an increase in noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $99 million (5.8 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $65 million (5.6 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower spread on loans. Noninterest income increased $34 million (6.2 percent) in the first quarter of 2017, compared with the first quarter of 2016, reflecting higher mortgage banking revenue driven by the value of MSRs, net of hedging activities.

Noninterest expense increased $61 million (5.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher compensation and employee benefits expenses, reflecting the impact of increased staffing and merit increases, and higher net shared services expense, reflecting the impact of implementation costs of capital investments to support business growth. The provision for credit losses increased $132 million in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to the release of reserves in the first quarter of 2016 as a result of improvements in the mortgage portfolio.

Wealth Management and Securities Services  Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $109 million of the Company's net income in the first quarter of 2017, or an increase of $31 million (39.7 percent) compared with the first quarter of 2016. The increase was primarily due to an increase in net revenue, partially offset by an increase in noninterest expense.

Net revenue increased $81 million (16.3 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was driven by higher net interest income, on a taxable-equivalent basis, of $62 million (53.0 percent), principally due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits. Noninterest income increased $19 million (5.0 percent) principally due to improved market conditions and account growth, along with the impact of lower money market fee waivers.

Noninterest expense increased $28 million (7.4 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily the result of higher compensation and employee benefits expenses, reflecting the impact of higher staffing and merit increases, higher net shared services expense, and higher other expense including the impact of the FDIC surcharge.

Payment Services  Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $274 million of the Company's net income in the first quarter of 2017, or a decrease of $13 million (4.5 percent) compared with the first quarter of 2016. The decrease was due to an increase in the provision for credit losses and an increase in noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $63 million (4.7 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $22 million (4.2 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher average loan balances and rates, in addition to higher fees. Noninterest income increased $41 million (5.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, due to an increase in credit and debit card revenue, corporate payment products revenue and merchant processing services revenue driven by higher volumes.

Noninterest expense increased $37 million (5.4 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to higher compensation and employee benefits expenses, reflecting

U.S. Bancorp 27
Table of Contents

 Table 11  Line of Business Financial Performance

Wholesale Banking and
Commercial Real Estate

Consumer and Small

Business Banking

Three Months Ended March 31,

(Dollars in Millions)

2017

2016

Percent

Change

2017

2016

Percent

Change

Condensed Income Statement

Net interest income (taxable-equivalent basis)

$ 587 $ 529 11.0 $ 1,222 $ 1,157 5.6

Noninterest income

244 206 18.4 585 551 6.2

Securities gains (losses), net

(3 *

Total net revenue

828 735 12.7 1,807 1,708 5.8

Noninterest expense

384 348 10.3 1,272 1,210 5.1

Other intangibles

1 1 7 8 (12.5

Total noninterest expense

385 349 10.3 1,279 1,218 5.0

Income before provision and income taxes

443 386 14.8 528 490 7.8

Provision for credit losses

36 201 (82.1 65 (67 *

Income before income taxes

407 185 * 463 557 (16.9

Income taxes and taxable-equivalent adjustment

148 67 * 168 203 (17.2

Net income

259 118 * 295 354 (16.7

Net (income) loss attributable to noncontrolling interests

Net income attributable to U.S. Bancorp

$ 259 $ 118 * $ 295 $ 354 (16.7

Average Balance Sheet

Commercial

$ 72,413 $ 69,496 4.2 $ 9,915 $ 10,048 (1.3 )% 

Commercial real estate

21,305 20,644 3.2 18,555 18,025 2.9

Residential mortgages

8 6 33.3 55,248 52,126 6.0

Credit card

Other retail

1 2 (50.0 51,689 49,004 5.5

Total loans, excluding covered loans

93,727 90,148 4.0 135,407 129,203 4.8

Covered loans

3,717 4,466 (16.8

Total loans

93,727 90,148 4.0 139,124 133,669 4.1

Goodwill

1,647 1,647 3,681 3,681

Other intangible assets

15 18 (16.7 2,768 2,513 10.1

Assets

102,308 98,444 3.9 153,666 148,019 3.8

Noninterest-bearing deposits

36,882 36,702 .5 26,974 25,965 3.9

Interest checking

9,256 6,861 34.9 46,320 42,141 9.9

Savings products

48,804 35,823 36.2 59,895 56,127 6.7

Time deposits

12,431 12,120 2.6 13,260 14,649 (9.5

Total deposits

107,373 91,506 17.3 146,449 138,882 5.4

Total U.S. Bancorp shareholders' equity

9,680 8,817 9.8 11,523 11,019 4.6

* Not meaningful

higher staffing to support business investment and compliance programs and merit increases, as well as higher net shared services expense. The provision for credit losses increased $49 million (25.5 percent) in the first quarter of 2017, compared with the first quarter of 2016, due to higher net charge-offs and an unfavorable change in the reserve allocation.

Treasury and Corporate Support  Treasury and Corporate Support includes the Company's investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $536 million in the first quarter of 2017, compared with $549 million in the first quarter of 2016. The $13 million (2.4 percent) decrease in net income in the first quarter of 2017 from the same period of the prior year was primarily due to a decrease in net revenue and an increase in noninterest expense.

Net revenue decreased $49 million (6.5 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, decreased $100 million (17.9 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to the impact of higher margin benefits on deposits credited to the business lines, partially offset by growth in the investment portfolio. Total noninterest income increased $51 million (25.9 percent) in the first quarter of 2017, compared with the first quarter of 2016, mainly due to income from equity investments and higher gains on investment securities.

Noninterest expense increased $33 million (27.5 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to higher compensation expense, reflecting the impact of increased staffing and merit increases including variable compensation. The increase in compensation expense was partially offset by lower net shared services expense. The provision for credit losses was $4 million (66.7 percent) lower in the first quarter of 2017, compared with the first quarter of 2016, due to lower net charge-offs and a favorable change in the reserve allocation.

Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

28 U.S. Bancorp
Table of Contents

Wealth Management and

Securities Services

Payment

Services

Treasury and

Corporate Support

Consolidated

Company

2017

2016

Percent

Change

2017

2016

Percent

Change

2017

2016

Percent

Change

2017

2016

Percent

Change

$ 179 $ 117 53.0 $ 549 $ 527 4.2 $ 458 $ 558 (17.9 )%  $ 2,995 $ 2,888 3.7
398 379 5.0 857 816 5.0 216 194 11.3 2,300 2,146 7.2
32 3 * 29 3 *
577 496 16.3 1,406 1,343 4.7 706 755 (6.5 5,324 5,037 5.7
399 370 7.8 692 656 5.5 153 120 27.5 2,900 2,704 7.2
5 6 (16.7 31 30 3.3 44 45 (2.2
404 376 7.4 723 686 5.4 153 120 27.5 2,944 2,749 7.1
173 120 44.2 683 657 4.0 553 635 (12.9 2,380 2,288 4.0
1 (2 * 241 192 25.5 2 6 (66.7 345 330 4.5
172 122 41.0 442 465 (4.9 551 629 (12.4 2,035 1,958 3.9
63 44 43.2 161 169 (4.7 9 74 (87.8 549 557 (1.4
109 78 39.7 281 296 (5.1 542 555 (2.3 1,486 1,401 6.1
(7 (9 22.2 (6 (6 (13 (15 13.3
$ 109 $ 78 39.7 $ 274 $ 287 (4.5 $ 536 $ 549 (2.4 $ 1,473 $ 1,386 6.3
$ 3,189 $ 2,894 10.2 $ 7,611 $ 7,022 8.4 $ 611 $ 360 69.7 $ 93,739 $ 89,820 4.4
510 534 (4.5 2,788 3,198 (12.8 43,158 42,401 1.8
2,644 2,076 27.4 57,900 54,208 6.8
20,845 20,244 3.0 20,845 20,244 3.0
1,614 1,540 4.8 480 551 (12.9 53,784 51,097 5.3
7,957 7,044 13.0 28,936 27,817 4.0 3,399 3,558 (4.5 269,426 257,770 4.5
15 45 (66.7 3,732 4,511 (17.3
7,957 7,044 13.0 28,936 27,817 4.0 3,414 3,603 (5.2 273,158 262,281 4.1
1,566 1,567 (.1 2,453 2,464 (.4 9,347 9,359 (.1
87 109 (20.2 437 508 (14.0 3,307 3,148 5.1
11,437 10,285 11.2 34,588 33,999 1.7 139,312 130,810 6.5 441,311 421,557 4.7
13,862 12,889 7.5 1,024 961 6.6 1,996 2,052 (2.7 80,738 78,569 2.8
10,065 8,864 13.5 40 44 (9.1 65,681 57,910 13.4
42,116 33,176 26.9 99 95 4.2 454 491 (7.5 151,368 125,712 20.4
4,756 3,545 34.2 199 3,373 (94.1 30,646 33,687 (9.0
70,799 58,474 21.1 1,123 1,056 6.3 2,689 5,960 (54.9 328,433 295,878 11.0
2,402 2,374 1.2 6,407 6,326 1.3 17,911 18,202 (1.6 47,923 46,738 2.5

NON-GAAP FINANCIAL MEASURES

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

Tangible common equity to tangible assets,
Tangible common equity to risk-weighted assets,
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach, and
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches.

These capital measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company's capital position relative to other financial services companies. These measures differ from currently effective capital ratios defined by banking regulations principally in that the numerator of the currently effective ratios, which are subject to certain transitional provisions, temporarily excludes a portion of unrealized gains and losses related to available-for-sale securities and retirement plan obligations, and includes a portion of capital related to intangible assets, other than MSRs. These capital measures are not defined in generally accepted accounting principles ("GAAP"), or are not currently effective or defined in federal banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

There may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this report in their entirety, and not to rely on any single financial measure.

U.S. Bancorp 29
Table of Contents

The following table shows the Company's calculation of these non-GAAP financial measures:

(Dollars in Millions)

March 31,

2017

December 31,
2016

Total equity

$ 48,433 $ 47,933

Preferred stock

(5,419 (5,501

Noncontrolling interests

(635 (635

Goodwill (net of deferred tax liability) (1)

(8,186 (8,203

Intangible assets, other than mortgage servicing rights

(671 (712

Tangible common equity (a)

33,522 32,882

Tangible common equity (as calculated above)

33,522 32,882

Adjustments (2)

(136 (55

Common equity tier 1 capital estimated for the Basel III fully implemented standardized and advanced approaches (b)

33,386 32,827

Total assets

449,522 445,964

Goodwill (net of deferred tax liability) (1)

(8,186 (8,203

Intangible assets, other than mortgage servicing rights

(671 (712

Tangible assets (c)

440,665 437,049
Risk-weighted assets, determined in accordance with prescribed transitional standardized approach regulatory
requirements (d)
356,373 358,237

Adjustments (3)

4,731 4,027

Risk-weighted assets estimated for the Basel III fully implemented standardized approach (e)

361,104 362,264

Risk-weighted assets, determined in accordance with prescribed transitional advanced approaches regulatory requirements

285,963 277,141

Adjustments (4)

5,046 4,295

Risk-weighted assets estimated for the Basel III fully implemented advanced approaches (f)

291,009 281,436

Ratios

Tangible common equity to tangible assets (a)/(c)

7.6 7.5

Tangible common equity to risk-weighted assets (a)/(d)

9.4 9.2
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized
approach (b)/(e)
9.2 9.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced
approaches (b)/(f)
11.5 11.7

Three Months Ended

March 31,

2017 2016

Net interest income

$ 2,945 $ 2,835

Taxable-equivalent adjustment (5)

50 53

Net interest income, on a taxable-equivalent basis

2,995 2,888

Net interest income, on a taxable-equivalent basis (as calculated above)

2,995 2,888

Noninterest income

2,329 2,149

Less: Securities gains (losses), net

29 3

Total net revenue, excluding net securities gains (losses) (g)

5,295 5,034

Noninterest expense (h)

2,944 2,749

Efficiency ratio (h)/(g)

55.6 54.6

(1) Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements.
(2) Includes net losses on cash flow hedges included in accumulated other comprehensive income (loss) and other adjustments.    
(3) Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, MSRs and other adjustments.    
(4) Primarily reflects higher risk-weighting for MSRs.    
(5) Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.    

30 U.S. Bancorp
Table of Contents

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company's financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company's financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company's financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, purchased loans and related indemnification assets, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company's Audit Committee. These accounting policies are discussed in detail in "Management's Discussion and Analysis - Critical Accounting Policies" and the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

U.S. Bancorp 31
Table of Contents

U.S. Bancorp

Consolidated Balance Sheet

(Dollars in Millions) March 31,
2017
December 31,
2016
(Unaudited

Assets

Cash and due from banks

$ 20,319 $ 15,705

Investment securities

Held-to-maturity (fair value $42,906 and $42,435, respectively)

43,393 42,991

Available-for-sale ($822 and $755 pledged as collateral, respectively) (a)

67,031 66,284

Loans held for sale (including $2,687 and $4,822 of mortgage loans carried at fair value, respectively)

2,738 4,826

Loans

Commercial

94,491 93,386

Commercial real estate

42,832 43,098

Residential mortgages

58,266 57,274

Credit card

20,387 21,749

Other retail

53,966 53,864

Total loans, excluding covered loans

269,942 269,371

Covered loans

3,635 3,836

Total loans

273,577 273,207

Less allowance for loan losses

(3,816 (3,813

Net loans

269,761 269,394

Premises and equipment

2,432 2,443

Goodwill

9,348 9,344

Other intangible assets

3,313 3,303

Other assets (including $462 and $314 of trading securities at fair value pledged as collateral, respectively) (a)

31,187 31,674

Total assets

$ 449,522 $ 445,964

Liabilities and Shareholders' Equity

Deposits

Noninterest-bearing

$ 85,222 $ 86,097

Interest-bearing (b)

251,651 248,493

Total deposits

336,873 334,590

Short-term borrowings

12,183 13,963

Long-term debt

35,948 33,323

Other liabilities

16,085 16,155

Total liabilities

401,089 398,031

Shareholders' equity

Preferred stock

5,419 5,501

Common stock, par value $0.01 a share - authorized: 4,000,000,000 shares; issued: 3/31/17 and 12/31/16 - 2,125,725,742 shares

21 21

Capital surplus

8,388 8,440

Retained earnings

51,069 50,151

Less cost of common stock in treasury: 3/31/17 - 433,951,270 shares; 12/31/16 - 428,813,585 shares

(15,660 (15,280

Accumulated other comprehensive income (loss)

(1,439 (1,535

Total U.S. Bancorp shareholders' equity

47,798 47,298

Noncontrolling interests

635 635

Total equity

48,433 47,933

Total liabilities and equity

$ 449,522 $ 445,964

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
(b) lncludes time deposits greater than $250,000 balances of $3.7 billion and $3.0 billion at March 31, 2017 and December 31, 2016, respectively.

See Notes to Consolidated Financial Statements.

32 U.S. Bancorp
Table of Contents

U.S. Bancorp

Consolidated Statement of Income

Three Months Ended
March 31,

(Dollars and Shares in Millions, Except Per Share Data)

(Unaudited)

        2017         2016

Interest Income

Loans

$ 2,797 $ 2,644

Loans held for sale

35 31

Investment securities

530 517

Other interest income

38 29

Total interest income

3,400 3,221

Interest Expense

Deposits

199 139

Short-term borrowings

66 65

Long-term debt

190 182

Total interest expense

455 386

Net interest income

2,945 2,835

Provision for credit losses

345 330

Net interest income after provision for credit losses

2,600 2,505

Noninterest Income

Credit and debit card revenue

292 266

Corporate payment products revenue

179 170

Merchant processing services

378 373

ATM processing services

85 80

Trust and investment management fees

368 339

Deposit service charges

177 168

Treasury management fees

153 142

Commercial products revenue

207 197

Mortgage banking revenue

207 187

Investment products fees

40 40

Securities gains (losses), net

Realized gains (losses), net

29 3

Total other-than-temporary impairment

(2

Portion of other-than-temporary impairment recognized in other comprehensive income

2

Total securities gains (losses), net

29 3

Other

214 184

Total noninterest income

2,329 2,149

Noninterest Expense

Compensation

1,391 1,249

Employee benefits

314 300

Net occupancy and equipment

247 248

Professional services

96 98

Marketing and business development

90 77

Technology and communications

235 233

Postage, printing and supplies

81 79

Other intangibles

44 45

Other

446 420

Total noninterest expense

2,944 2,749

Income before income taxes

1,985 1,905

Applicable income taxes

499 504

Net income

1,486 1,401

Net (income) loss attributable to noncontrolling interests

(13 (15

Net income attributable to U.S. Bancorp

$ 1,473 $ 1,386

Net income applicable to U.S. Bancorp common shareholders

$ 1,387 $ 1,329

Earnings per common share

$ .82 $ .77

Diluted earnings per common share

$ .82 $ .76

Dividends declared per common share

$ .280 $ .255

Average common shares outstanding

1,694 1,737

Average diluted common shares outstanding

1,701 1,743

See Notes to Consolidated Financial Statements.

U.S. Bancorp 33
Table of Contents

U.S. Bancorp

Consolidated Statement of Comprehensive Income

(Dollars in Millions)

(Unaudited)

Three Months Ended
March 31,
        2017         2016

Net income

$ 1,486 $ 1,401

Other Comprehensive Income (Loss)

Changes in unrealized gains and losses on securities available-for-sale

127 488

Other-than-temporary impairment not recognized in earnings on securities available-for-sale

(2

Changes in unrealized gains and losses on derivative hedges

7 (96

Foreign currency translation

10 (16

Reclassification to earnings of realized gains and losses

11 76

Income taxes related to other comprehensive income (loss)

(59 (175

Total other comprehensive income (loss)

96 275

Comprehensive income

1,582 1,676

Comprehensive (income) loss attributable to noncontrolling interests

(13 (15

Comprehensive income attributable to U.S. Bancorp

$ 1,569 $ 1,661

See Notes to Consolidated Financial Statements.

34 U.S. Bancorp
Table of Contents

U.S. Bancorp

Consolidated Statement of Shareholders' Equity

U.S. Bancorp Shareholders

(Dollars and Shares in Millions)

(Unaudited)

Common Shares
Outstanding
Preferred
Stock
Common
Stock
Capital
Surplus
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)

Total

U.S. Bancorp
Shareholders'
Equity
Noncontrolling
Interests
Total
Equity

Balance December 31, 2015

1,745 $ 5,501 $ 21 $ 8,376 $ 46,377 $ (13,125 $ (1,019 $ 46,131 $ 686 $ 46,817

Net income (loss)

1,386 1,386 15 1,401

Other comprehensive income (loss)

275 275 275

Preferred stock dividends

(61 (61 (61

Common stock dividends

(444 (444 (444

Issuance of common and treasury stock

3 (61 92 31 31

Purchase of treasury stock

(16 (625 (625 (625

Distributions to noncontrolling interests

(13 (13

Purchase of noncontrolling interests

1 9 10 (50 (40

Stock option and restricted stock grants

52 52 52

Balance March 31, 2016

1,732 $ 5,501 $ 21 $ 8,368 $ 47,267 $ (13,658 $ (744 $ 46,755 $ 638 $ 47,393

Balance December 31, 2016

1,697 $ 5,501 $ 21 $ 8,440 $ 50,151 $ (15,280 $ (1,535 $ 47,298 $ 635 $ 47,933

Net income (loss)

1,473 1,473 13 1,486

Other comprehensive income (loss)

96 96 96

Preferred stock dividends

(69 (69 (69

Common stock dividends

(476 (476 (476

Issuance of preferred stock

993 993 993

Call of preferred stock

(1,075 (10 (1,085 (1,085

Issuance of common and treasury stock

6 (107 220 113 113

Purchase of treasury stock

(11 (600 (600 (600

Distributions to noncontrolling interests

(13 (13

Stock option and restricted stock grants

55 55 55

Balance March 31, 2017

1,692 $ 5,419 $ 21 $ 8,388 $ 51,069 $ (15,660 $ (1,439 $ 47,798 $ 635 $ 48,433

See Notes to Consolidated Financial Statements.

U.S. Bancorp 35
Table of Contents

U.S. Bancorp

Consolidated Statement of Cash Flows

(Dollars in Millions)

(Unaudited)

Three Months Ended
March 31,
2017 2016

Operating Activities

Net income attributable to U.S. Bancorp

$ 1,473 $ 1,386

Adjustments to reconcile net income to net cash provided by operating activities

Provision for credit losses

345 330

Depreciation and amortization of premises and equipment

73 74

Amortization of intangibles

44 45

(Gain) loss on sale of loans held for sale

(116 (194

(Gain) loss on sale of securities and other assets

(146 (90

Loans originated for sale in the secondary market, net of repayments

(7,802 (8,883

Proceeds from sales of loans held for sale

9,968 8,198

Other, net

(649 395

Net cash provided by operating activities

3,190 1,261

Investing Activities

Proceeds from sales of available-for-sale investment securities

828 530

Proceeds from maturities of held-to-maturity investment securities

2,085 2,088

Proceeds from maturities of available-for-sale investment securities

2,786 3,212

Purchases of held-to-maturity investment securities

(2,500 (625

Purchases of available-for-sale investment securities

(4,253 (6,183

Net increase in loans outstanding

(250 (3,702

Proceeds from sales of loans

439 299

Purchases of loans

(932 (658

Other, net

76 150

Net cash used in investing activities

(1,721 (4,889

Financing Activities

Net increase in deposits

2,283 5,950

Net decrease in short-term borrowings

(1,780 (4,100

Proceeds from issuance of long-term debt

3,162 6,607

Principal payments or redemption of long-term debt

(473 (3,907

Proceeds from issuance of preferred stock

993

Proceeds from issuance of common stock

112 33

Repurchase of common stock

(594 (568

Cash dividends paid on preferred stock

(80 (66

Cash dividends paid on common stock

(478 (447

Purchase of noncontrolling interests

(40

Net cash provided by financing activities

3,145 3,462

Change in cash and due from banks

4,614 (166

Cash and due from banks at beginning of period

15,705 11,147

Cash and due from banks at end of period

$ 20,319 $ 10,981

See Notes to Consolidated Financial Statements.

36 U.S. Bancorp
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 Note 1  Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the "Company"), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs, expenses and other financial elements to each line of business. Table 11 "Line of Business Financial Performance" included in Management's Discussion and Analysis provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.

 Note 2  Accounting Changes

Stock-Based Compensation Effective January 1, 2017, the Company adopted accounting guidance, issued by the Financial Accounting Standards Board ("FASB") in March 2016, simplifying the accounting for stock-based compensation awards issued to employees. The guidance requires all excess tax benefits and deficiencies that pertain to stock-based compensation awards to be recognized within income tax expense instead of within capital surplus. The adoption of this guidance did not have a material impact on the Company's financial statements.

Revenue Recognition In May 2014, the FASB issued accounting guidance, effective for the Company on January 1, 2018, clarifying the principles for recognizing revenue from certain contracts with customers. The guidance does not apply to revenue associated with financial instruments, such as loans and securities. The Company is currently evaluating the adoption of this guidance using either a fully retrospective approach, where the guidance would be applied to all periods presented in the financial statements, or a modified retrospective approach, where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. The Company expects the adoption of this guidance will not be material to its financial statements.

Accounting for Leases In February 2016, the FASB issued accounting guidance, effective for the Company on January 1, 2019, related to the accounting for leases. This guidance requires lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities based primarily on the present value of future lease payments. Lessor accounting is largely unchanged. A modified retrospective approach is required at adoption which requires all prior periods presented in the financial statements to be restated, with a cumulative effect adjustment to retained earnings as of the beginning of the earliest period presented. This guidance also requires additional disclosures regarding leasing arrangements. The Company expects the adoption of this guidance will not be material to its financial statements.

Financial Instruments-Credit Losses In June 2016, the FASB issued accounting guidance, effective for the Company no later than January 1, 2020, related to the impairment of financial instruments. This guidance changes existing impairment recognition to a model that is based on expected losses rather than incurred losses, which is intended to result in more timely recognition of credit losses. This guidance is also intended to reduce the complexity of current accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. A modified retrospective approach is required at adoption with a cumulative effect adjustment to retained earnings as of the adoption date. The guidance also requires additional credit quality disclosures for loans. The Company is currently evaluating the impact of this guidance on its financial statements, and expects its allowance for credit losses to increase upon adoption. The extent of this increase will continue to be evaluated and will depend on economic conditions and the composition of the Company's loan portfolio at the time of adoption.

U.S. Bancorp 37
Table of Contents

 Note 3  Investment Securities

The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities were as follows:

March 31, 2017 December 31, 2016
Unrealized Losses Unrealized Losses
(Dollars in Millions) Amortized
Cost
Unrealized
Gains
Other-than-
Temporary (e)
Other (f)

Fair

Value

Amortized
Cost
Unrealized
Gains
Other-than-
Temporary (e)
Other (f)

Fair

Value

Held-to-maturity (a)

U.S. Treasury and agencies

$ 5,576 $ 14 $ $ (113 $ 5,477 $ 5,246 $ 12 $ $ (132 $ 5,126

Mortgage-backed securities

Residential

Agency

37,774 75 (472 37,377 37,706 85 (529 37,262

Non-agency non-prime (d)

1 1 1 1

Asset-backed securities

Collateralized debt obligations/Collateralized loan obligations

6 6 5 5

Other

8 2 10 8 3 11

Obligations of state and political subdivisions

6 1 7 6 1 7

Obligations of foreign governments

13 13 9 9

Other debt securities

15 15 15 (1 14

Total held-to-maturity

$ 43,393 $ 98 $ $ (585 $ 42,906 $ 42,991 $ 106 $ $ (662 $ 42,435

Available-for-sale (b)

U.S. Treasury and agencies

$ 19,309 $ 13 $ $ (169 $ 19,153 $ 17,314 $ 11 $ $ (198 $ 17,127

Mortgage-backed securities

Residential

Agency

42,492 216 (582 42,126 43,558 225 (645 43,138

Non-agency

Prime (c)

240 6 (3 (1 242

Non-prime (d)

178 20 (3 195

Commercial agency

14 14 15 15

Other asset-backed securities

436 7 443 475 8 483

Obligations of state and political subdivisions

5,353 55 (152 5,256 5,167 55 (183 5,039

Corporate debt securities

11 (2 9

Other investments

30 9 39 27 9 36

Total available-for-sale

$ 67,634 $ 300 $ $ (903 $ 67,031 $ 66,985 $ 334 $ (6 $ (1,029 $ 66,284

(a) Held-to-maturity investment securities are carried at historical cost or at fair value at the time of transfer from the available-for-sale to held-to-maturity category, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.
(b) Available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders' equity.
(c) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads). When the Company determines the designation, prime securities typically have a weighted-average credit score of 725 or higher and a loan-to-value of 80 percent or lower; however, other pool characteristics may result in designations that deviate from these credit score and loan-to-value thresholds.
(d) Includes all securities not meeting the conditions to be designated as prime.
(e) Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.
(f) Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

The weighted-average maturity of the available-for-sale investment securities was 4.9 years at March 31, 2017, compared with 5.1 years at December 31, 2016. The corresponding weighted-average yields were 2.12 percent and 2.06 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.6 years at March 31, 2017 and December 31, 2016. The corresponding weighted-average yields were 2.03 percent and 1.93 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at March 31, 2017, refer to Table 4 included in Management's Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $11.4 billion at March 31, 2017, and $11.3 billion at December 31, 2016, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $822 million at March 31, 2017, and $755 million at December 31, 2016.

38 U.S. Bancorp
Table of Contents

The following table provides information about the amount of interest income from taxable and non-taxable investment securities:

Three Months Ended March 31,

(Dollars in Millions)

        2017         2016

Taxable

$ 483 $ 465

Non-taxable

47 52

Total interest income from investment securities

$ 530 $ 517

The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:

Three Months Ended March 31,

(Dollars in Millions)

        2017         2016

Realized gains

$ 47 $ 3

Realized losses

(18

Net realized gains (losses)

$ 29 $ 3

Income tax (benefit) on net realized gains (losses)

$ 11 $ 1

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, the credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities. The Company determines other-than-temporary impairment recorded in earnings for debt securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) is measured as the difference between that discounted amount and the fair value of each investment security. The total amount of other-than-temporary impairment recorded was immaterial for the three months ended March 31, 2017 and 2016.

Changes in the credit losses on debt securities are summarized as follows:

Three Months Ended March 31,

(Dollars in Millions)

        2017         2016

Balance at beginning of period

$ 75 $ 84

Realized losses (a)

(3

Credit losses on security sales

(75

Balance at end of period

$ $ 81

(a) Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company's portfolio under the terms of the securitization transaction documents.

At March 31, 2017, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company's investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at March 31, 2017:

Less Than 12 Months 12 Months or Greater Total
(Dollars in Millions)

Fair

Value

Unrealized
Losses
Fair
Value
Unrealized
Losses

Fair

Value

Unrealized
Losses

Held-to-maturity

U.S. Treasury and agencies

$ 3,841 $ (113 $ $ $ 3,841 $ (113

Residential agency mortgage-backed securities

26,372 (410 2,142 (62 28,514 (472

Other asset-backed securities

5 5

Other debt securities

15 15

Total held-to-maturity

$ 30,228 $ (523 $ 2,147 $ (62 $ 32,375 $ (585

Available-for-sale

U.S. Treasury and agencies

$ 15,616 $ (169 $ $ $ 15,616 $ (169

Residential agency mortgage-backed securities

27,465 (486 4,149 (96 31,614 (582

Commercial agency mortgage-backed securities

9 9

Obligations of state and political subdivisions

2,222 (152 4 2,226 (152

Other investments

1 1

Total available-for-sale

$ 45,312 $ (807 $ 4,154 $ (96 $ 49,466 $ (903

U.S. Bancorp 39
Table of Contents

The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that have unrealized losses are either U.S. Treasury and agencies, agency mortgage-backed or state and political securities. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At March 31, 2017, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.

 Note  Loans and Allowance for Credit Losses

The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:

March 31, 2017 December 31, 2016
(Dollars in Millions) Amount Percent
of Total
Amount Percent
of Total

Commercial

Commercial

$ 88,883 32.5 $ 87,928 32.2

Lease financing

5,608 2.0 5,458 2.0

Total commercial

94,491 34.5 93,386 34.2

Commercial Real Estate

Commercial mortgages

31,046 11.4 31,592 11.6

Construction and development

11,786 4.3 11,506 4.2

Total commercial real estate

42,832 15.7 43,098 15.8

Residential Mortgages

Residential mortgages

44,667 16.3 43,632 16.0

Home equity loans, first liens

13,599 5.0 13,642 5.0

Total residential mortgages

58,266 21.3 57,274 21.0

Credit Card

20,387 7.5 21,749 7.9

Other Retail

Retail leasing

6,793 2.5 6,316 2.3

Home equity and second mortgages

16,163 5.9 16,369 6.0

Revolving credit

3,164 1.1 3,282 1.2

Installment

8,179 3.0 8,087 3.0

Automobile

17,522 6.4 17,571 6.4

Student

2,145 .8 2,239 .8

Total other retail

53,966 19.7 53,864 19.7

Total loans, excluding covered loans

269,942 98.7 269,371 98.6

Covered Loans

3,635 1.3 3,836 1.4

Total loans

$ 273,577 100.0 $ 273,207 100.0

The Company had loans of $83.2 billion at March 31, 2017, and $84.5 billion at December 31, 2016, pledged at the Federal Home Loan Bank, and loans of $66.3 billion at March 31, 2017, and $66.5 billion at December 31, 2016, pledged at the Federal Reserve Bank.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs. Net unearned interest and deferred fees and costs amounted to $734 million at March 31, 2017, and $672 million at December 31, 2016. All purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered "purchased impaired loans." All other purchased loans are considered "purchased nonimpaired loans."

Changes in the accretable balance for purchased impaired loans were as follows:

Three Months Ended March 31,

(Dollars in Millions)

     2017      2016

Balance at beginning of period

$ 698 $ 957

Accretion

(90 (92

Disposals

(23 (21

Reclassifications from nonaccretable difference (a)

53 169

Other

(1

Balance at end of period

$ 637 $ 1,013

(a) Primarily relates to changes in expected credit performance.          

40 U.S. Bancorp
Table of Contents

Allowance for Credit Losses The allowance for credit losses is established for probable and estimable losses incurred in the Company's loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the Federal Deposit Insurance Corporation ("FDIC"). The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 16-year period of loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical time frame is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, portfolio growth and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower's ability to pay in determining the allowance for credit losses.

The allowance recorded for Troubled Debt Restructuring ("TDR") loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed loan-to-value ratios when possible, portfolio growth and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as the borrower's ability to pay under the restructured terms, and the timing and amount of payments.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans and reflects decreases in expected cash flows of those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, subsequent payment defaults on loan modifications considered TDRs are considered in the underlying factors used in the determination of the appropriateness of the allowance for credit losses. For each loan segment, the Company estimates future loan charge-offs through a variety of analysis, trends and underlying assumptions. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. With respect to the consumer lending segment, performance of the portfolio, including defaults on TDRs, is considered when estimating future cash flows.

The Company's methodology for determining the appropriate allowance for credit losses for each loan segment also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards and other relevant business practices; results of internal review; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company's allowance for credit losses for each of the above loan segments.

The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The

U.S. Bancorp 41
Table of Contents

liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.

Activity in the allowance for credit losses by portfolio class was as follows:

(Dollars in Millions) Commercial Commercial
Real Estate
Residential
Mortgages
Credit
Card
Other
Retail
Total Loans,
Excluding
Covered Loans
Covered
Loans
Total
Loans

Balance at December 31, 2016

$ 1,450 $ 812 $ 510 $ 934 $ 617 $ 4,323 $ 34 $ 4,357

Add

Provision for credit losses

54 28 (13 211 65 345 345

Deduct

Loans charged-off

96 3 17 212 89 417 417

Less recoveries of loans charged-off

(21 (5 (5 (22 (29 (82 (82

Net loans charged-off

75 (2 12 190 60 335 335

Other changes (a)

(1 (1

Balance at March 31, 2017

$ 1,429 $ 842 $ 485 $ 955 $ 622 $ 4,333 $ 33 $ 4,366

Balance at December 31, 2015

$ 1,287 $ 724 $ 631 $ 883 $ 743 $ 4,268 $ 38 $ 4,306

Add

Provision for credit losses

237 5 (56 157 (11 332 (2 330

Deduct

Loans charged-off

111 3 23 188 80 405 405

Less recoveries of loans charged-off

(28 (8 (4 (24 (26 (90 (90

Net loans charged-off

83 (5 19 164 54 315 315

Other changes (a)

(1 (1 (1

Balance at March 31, 2016

$ 1,441 $ 734 $ 556 $ 875 $ 678 $ 4,284 $ 36 $ 4,320

(a) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

Additional detail of the allowance for credit losses by portfolio class was as follows:

(Dollars in Millions) Commercial Commercial
Real Estate
Residential
Mortgages
Credit
Card
Other
Retail
Total Loans,
Excluding
Covered Loans
Covered
Loans
Total
Loans

Allowance Balance at March 31, 2017 Related to

Loans individually evaluated for impairment (a)

$ 50 $ 4 $ $ $ $ 54 $ $ 54

TDRs collectively evaluated for impairment

17 3 162 65 17 264 1 265

Other loans collectively evaluated for impairment

1,362 830 323 890 605 4,010 4,010

Loans acquired with deteriorated credit quality

5 5 32 37

Total allowance for credit losses

$ 1,429 $ 842 $ 485 $ 955 $ 622 $ 4,333 $ 33 $ 4,366

Allowance Balance at December 31, 2016 Related to

Loans individually evaluated for impairment (a)

$ 50 $ 4 $ $ $ $ 54 $ $ 54

TDRs collectively evaluated for impairment

12 4 180 65 20 281 1 282

Other loans collectively evaluated for impairment

1,388 798 330 869 597 3,982 3,982

Loans acquired with deteriorated credit quality

6 6 33 39

Total allowance for credit losses

$ 1,450 $ 812 $ 510 $ 934 $ 617 $ 4,323 $ 34 $ 4,357

(a) Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.

Additional detail of loan balances by portfolio class was as follows:

(Dollars in Millions) Commercial Commercial
Real Estate
Residential
Mortgages
Credit
Card
Other
Retail
Total Loans,
Excluding
Covered Loans
Covered
Loans (b)
Total
Loans

March 31, 2017

Loans individually evaluated for impairment (a)

$ 534 $ 62 $ $ $ $ 596 $ $ 596

TDRs collectively evaluated for impairment

170 131 3,749 229 169 4,448 34 4,482

Other loans collectively evaluated for impairment

93,780 42,523 54,516 20,158 53,796 264,773 1,421 266,194

Loans acquired with deteriorated credit quality

7 116 1 1 125 2,180 2,305

Total loans

$ 94,491 $ 42,832 $ 58,266 $ 20,387 $ 53,966 $ 269,942 $ 3,635 $ 273,577

December 31, 2016

Loans individually evaluated for impairment (a)

$ 623 $ 70 $ $ $ $ 693 $ $ 693

TDRs collectively evaluated for impairment

145 146 3,678 222 173 4,364 35 4,399

Other loans collectively evaluated for impairment

92,611 42,751 53,595 21,527 53,691 264,175 1,553 265,728

Loans acquired with deteriorated credit quality

7 131 1 139 2,248 2,387

Total loans

$ 93,386 $ 43,098 $ 57,274 $ 21,749 $ 53,864 $ 269,371 $ 3,836 $ 273,207

(a) Represents loans greater than $5 million classified as nonperforming or TDRs.
(b) Includes expected reimbursements from the FDIC under loss sharing agreements.

42 U.S. Bancorp
Table of Contents

Credit Quality The credit quality of the Company's loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company.

For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.

Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.

Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due. Residential mortgage loans and lines in a first lien position are placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Residential mortgage loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when they are behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged-off. Credit cards are charged-off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged-off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.

For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan's carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.

Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable, and those loans are classified as nonaccrual loans with interest income not recognized until the timing and amount of the future cash flows can be reasonably estimated.

U.S. Bancorp 43
Table of Contents

The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:

Accruing
(Dollars in Millions) Current 30-89 Days
Past Due
90 Days or
More Past Due
Nonperforming Total

March 31, 2017

Commercial

$ 93,784 $ 216 $ 52 $ 439 $ 94,491

Commercial real estate

42,653 65 4 110 42,832

Residential mortgages (a)

57,429 120 142 575 58,266

Credit card

19,882 252 251 2 20,387

Other retail

53,486 248 75 157 53,966

Total loans, excluding covered loans

267,234 901 524 1,283 269,942

Covered loans

3,389 45 194 7 3,635

Total loans

$ 270,623 $ 946 $ 718 $ 1,290 $ 273,577

December 31, 2016

Commercial

$ 92,588 $ 263 $ 52 $ 483 $ 93,386

Commercial real estate

42,922 44 8 124 43,098

Residential mortgages (a)

56,372 151 156 595 57,274

Credit card

21,209 284 253 3 21,749

Other retail

53,340 284 83 157 53,864

Total loans, excluding covered loans

266,431 1,026 552 1,362 269,371

Covered loans

3,563 55 212 6 3,836

Total loans

$ 269,994 $ 1,081 $ 764 $ 1,368 $ 273,207

(a) At March 31, 2017, $221 million of loans 30–89 days past due and $2.4 billion of loans 90 days or more past due purchased from Government National Mortgage Association ("GNMA") mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, were classified as current, compared with $273 million and $2.5 billion at December 31, 2016, respectively.

At March 31, 2017, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned ("OREO"), was $168 million ($146 million excluding covered assets), compared with $201 million ($175 million excluding covered assets) at December 31, 2016. These amounts exclude $360 million and $373 million at March 31, 2017 and December 31, 2016, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at March 31, 2017 and December 31, 2016, was $2.1 billion, of which $1.6 billion related to loans purchased from Government National Mortgage Association ("GNMA") mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis. These ratings include pass, special mention and classified, and are an important part of the Company's overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company's rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential weakness deserving management's close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.

44 U.S. Bancorp
Table of Contents

The following table provides a summary of loans by portfolio class and the Company's internal credit quality rating:

Criticized
(Dollars in Millions) Pass Special
Mention
Classified (a) Total
Criticized
Total

March 31, 2017

Commercial (b)

$ 90,899 $ 1,820 $ 1,772 $ 3,592 $ 94,491

Commercial real estate

41,371 698 763 1,461 42,832

Residential mortgages (c)

57,486 4 776 780 58,266

Credit card

20,134 253 253 20,387

Other retail

53,690 2 274 276 53,966

Total loans, excluding covered loans

263,580 2,524 3,838 6,362 269,942

Covered loans

3,569 66 66 3,635

Total loans

$ 267,149 $ 2,524 $ 3,904 $ 6,428 $ 273,577

Total outstanding commitments

$ 566,122 $ 5,215 $ 5,392 $ 10,607 $ 576,729

December 31, 2016

Commercial (b)

$ 89,739 $ 1,721 $ 1,926 $ 3,647 $ 93,386

Commercial real estate

41,634 663 801 1,464 43,098

Residential mortgages (c)

56,457 10 807 817 57,274

Credit card

21,493 256 256 21,749

Other retail

53,576 6 282 288 53,864

Total loans, excluding covered loans

262,899 2,400 4,072 6,472 269,371

Covered loans

3,766 70 70 3,836

Total loans

$ 266,665 $ 2,400 $ 4,142 $ 6,542 $ 273,207

Total outstanding commitments

$ 562,704 $ 4,920 $ 5,629 $ 10,549 $ 573,253

(a) Classified rating on consumer loans primarily based on delinquency status.
(b) At March 31, 2017, $1.0 billion of energy loans ($2.8 billion of total outstanding commitments) had a special mention or classified rating, compared with $1.2 billion of energy loans ($2.8 billion of total outstanding commitments) at December 31, 2016.
(c) At March 31, 2017, $2.4 billion of GNMA loans 90 days or more past due and $1.7 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $2.5 billion and $1.6 billion at December 31, 2016, respectively.

For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is generally not recognized on other impaired loans until the loan is paid off. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and, therefore, whether those loans are impaired include, but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower's estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card loans and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified, and considers any government guarantee where applicable. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.

U.S. Bancorp 45
Table of Contents

A summary of impaired loans, which include all nonaccrual and TDR loans, by portfolio class was as follows:

(Dollars in Millions) Period-end
Recorded
Investment (a)
Unpaid
Principal
Balance
Valuation
Allowance
Commitments
to Lend
Additional
Funds

March 31, 2017

Commercial

$ 784 $ 1,168 $ 69 $ 365

Commercial real estate

263 624 9

Residential mortgages

2,206 2,700 129

Credit card

229 229 65

Other retail

279 455 19 3

Total loans, excluding GNMA and covered loans

3,761 5,176 291 368

Loans purchased from GNMA mortgage pools

1,717 1,717 34

Covered loans

36 43 1 1

Total

$ 5,514 $ 6,936 $ 326 $ 369

December 31, 2016

Commercial

$ 849 $ 1,364 $ 68 $ 284

Commercial real estate

293 697 10

Residential mortgages

2,274 2,847 153

Credit card

222 222 64

Other retail

281 456 22 4

Total loans, excluding GNMA and covered loans

3,919 5,586 317 288

Loans purchased from GNMA mortgage pools

1,574 1,574 28

Covered loans

36 42 1 1

Total

$ 5,529 $ 7,202 $ 346 $ 289

(a) Substantially all loans classified as impaired at March 31, 2017 and December 31, 2016, had an associated allowance for credit losses.

Additional information on impaired loans follows:

2017 2016

Three Months Ended March 31,

(Dollars in Millions)

Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized

Commercial

$ 817 $ 1 $ 670 $ 1

Commercial real estate

278 2 326 3

Residential mortgages

2,240 29 2,539 32

Credit card

225 1 211 1

Other retail

280 4 305 3

Total loans, excluding GNMA and covered loans

3,840 37 4,051 40

Loans purchased from GNMA mortgage pools

1,646 18 1,867 25

Covered loans

36 39

Total

$ 5,522 $ 55 $ 5,957 $ 65

Troubled Debt Restructurings In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

46 U.S. Bancorp
Table of Contents

The following table provides a summary of loans modified as TDRs during the periods presented by portfolio class:

2017 2016

Three Months Ended March 31,

(Dollars in Millions)

Number
of Loans
Pre-Modification
Outstanding
Loan Balance
Post-Modification
Outstanding
Loan Balance
Number
of Loans
Pre-Modification
Outstanding
Loan Balance
Post-Modification
Outstanding
Loan Balance

Commercial

830 $ 137 $ 128 601 $ 160 $ 161

Commercial real estate

23 9 8 24 7 7

Residential mortgages

356 40 41 278 32 32

Credit card

9,405 45 46 7,988 38 39

Other retail

622 11 9 609 11 11

Total loans, excluding GNMA and covered loans

11,236 242 232 9,500 248 250

Loans purchased from GNMA mortgage pools

2,929 387 378 2,868 313 311

Covered loans

4 1 1 3

Total loans

14,169 $ 630 $ 611 12,371 $ 561 $ 561

Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification programs. For those loans modified as TDRs during the first quarter of 2017, at March 31, 2017, 206 residential mortgages, 20 home equity and second mortgage loans and 2,636 loans purchased from GNMA mortgage pools with outstanding balances of $26 million, $1 million and $351 million, respectively, were in a trial period and have estimated post-modification balances of $27 million, $1 million and $342 million, respectively, assuming permanent modification occurs at the end of the trial period.

The Company has implemented certain restructuring programs that may result in TDRs. However, many of the Company's TDRs are also determined on a case-by-case basis in connection with ongoing loan collection processes.

For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies all of the above concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, or its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.

In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for accounting and disclosure purposes if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under loss sharing agreements with the FDIC.

U.S. Bancorp 47
Table of Contents

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) during the periods presented that were modified as TDRs within 12 months previous to default:

2017 2016

Three Months Ended March 31,

(Dollars in Millions)

Number
of Loans
Amount
Defaulted
Number
of Loans
Amount
Defaulted

Commercial

173 $ 8 112 $ 2

Commercial real estate

8 2 10 5

Residential mortgages

72 9 31 5

Credit card

2,047 9 1,573 7

Other retail

129 2 78 1

Total loans, excluding GNMA and covered loans

2,429 30 1,804 20

Loans purchased from GNMA mortgage pools

218 30 26 3

Covered loans

Total loans

2,647 $ 60 1,830 $ 23

In addition to the defaults in the table above, the Company had a total of 426 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools for the three months ended March 31, 2017, where borrowers did not successfully complete the trial period arrangement and, therefore, are no longer eligible for a permanent modification under the applicable modification program. These loans had aggregate outstanding balances of $51 million for three months ended March 31, 2017.

Covered Assets Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans and other assets as shown in the following table:

March 31, 2017 December 31, 2016
(Dollars in Millions) Purchased
Impaired
Loans
Purchased
Nonimpaired
Loans
Other Total Purchased
Impaired
Loans
Purchased
Nonimpaired
Loans
Other Total

Residential mortgage loans

$ 2,180 $ 475 $ $ 2,655 $ 2,248 $ 506 $ $ 2,754

Other retail loans

238 238 278 278

Losses reimbursable by the FDIC (a)

338 338 381 381

Unamortized changes in FDIC asset (b)

404 404 423 423

Covered loans

2,180 713 742 3,635 2,248 784 804 3,836

Foreclosed real estate

22 22 26 26

Total covered assets

$ 2,180 $ 713 $ 764 $ 3,657 $ 2,248 $ 784 $ 830 $ 3,862

(a) Relates to loss sharing agreements with remaining terms up to two years.
(b) Represents decreases in expected reimbursements by the FDIC as a result of decreases in expected losses on the covered loans. These amounts are amortized as a reduction in interest income on covered loans over the shorter of the expected life of the respective covered loans or the remaining contractual term of the indemnification agreements.

Interest income is recognized on purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.

 Note 5  Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities

The Company transfers financial assets in the normal course of business. The majority of the Company's financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises ("GSEs"), transfers of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 15.

For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company's continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on mortgage servicing rights ("MSRs"),

48 U.S. Bancorp
Table of Contents

refer to Note 6. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.

The Company also provides financial support primarily through the use of waivers of management fees associated with various unconsolidated registered money market funds it manages. The Company provided $6 million and $17 million of support to the funds during the three months ended March 31, 2017 and 2016, respectively.

The Company is involved in various entities that are considered to be variable interest entities ("VIEs"). The Company's investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company's regulatory compliance with the Community Reinvestment Act. The Company's investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other tax-advantaged investments in tax expense of $161 million and $168 million for the three months ended March 31, 2017 and 2016, respectively. The Company also recognized $259 million and $223 million of investment tax credits for the three months ended March 31, 2017 and 2016, respectively. The Company recognized $145 million and $151 million of expenses related to all of these investments for the three months ended March 31, 2017 and 2016, of which $63 million and $67 million, respectively, were included in tax expense and the remaining amounts were included in noninterest expense.

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities' most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs.

The Company's investments in these unconsolidated VIEs are carried in other assets on the Consolidated Balance Sheet. The Company's unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in other liabilities on the Consolidated Balance Sheet. The Company's maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company's Consolidated Balance Sheet, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in community development and tax-advantaged VIEs that the Company has not consolidated:

(Dollars in Millions)

March 31,

2017

December 31,

2016

Investment carrying amount

$ 5,025 $ 5,009

Unfunded capital and other commitments

2,442 2,477

Maximum exposure to loss

10,641 10,373

The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company's recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $29 million at March 31, 2017, compared with $28 million at December 31, 2016. The maximum exposure to loss related to these VIEs was $49 million at March 31, 2017 and $50 million at December 31, 2016, representing the Company's investment balance and its unfunded commitments to invest additional amounts.

The Company's individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $60 million at March 31, 2017, compared with less than $1 million to $40 million at December 31, 2016.

The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At

U.S. Bancorp 49
Table of Contents

March 31, 2017, approximately $3.4 billion of the Company's assets and $2.5 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $3.5 billion and $2.6 billion, respectively, at December 31, 2016. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company's exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.

The Company also sponsors a conduit to which it previously transferred high-grade investment securities. The Company consolidates the conduit because of its ability to manage the activities of the conduit. At March 31, 2017, $23 million of the held-to-maturity investment securities on the Company's Consolidated Balance Sheet were related to the conduit, compared with $24 million at December 31, 2016.

In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program's entities, is entitled to the residual returns and provides credit, liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program's entities. At March 31, 2017, $1.5 billion of available-for-sale investment securities and $1.5 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $1.1 billion of available-for-sale investment securities and $1.1 billion of short-term borrowings at December 31, 2016.

 Note 6  Mortgage Servicing Rights

The Company serviced $233.6 billion of residential mortgage loans for others at March 31, 2017, and $232.6 billion at December 31, 2016, which include subserviced mortgages with no corresponding MSRs asset. The net impact included in mortgage banking revenue of fair value changes of MSRs due to changes in valuation assumptions and derivatives used to economically hedge MSRs were net gains of $12 million and net losses of $22 million for the three months ended March 31, 2017 and 2016, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue, were $192 million and $184 million for the three months ended March 31, 2017 and 2016, respectively.

Changes in fair value of capitalized MSRs are summarized as follows:

Three Months Ended March 31,
(Dollars in Millions) 2017 2016

Balance at beginning of period

$ 2,591 $ 2,512

Rights purchased

2 8

Rights capitalized

122 99

Changes in fair value of MSRs

Due to fluctuations in market interest rates (a)

20 (301

Due to revised assumptions or models (b)

12

Other changes in fair value (c)

(105 (96

Balance at end of period

$ 2,642 $ 2,222

(a) Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits.
(b) Includes changes in MSR value not caused by changes in market interest rates, such as changes in cost to service, ancillary income and option adjusted spread, as well as the impact of any model changes.
(c) Primarily represents changes due to realization of expected cash flows over time (decay).

The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments was as follows:

March 31, 2017 December 31, 2016
(Dollars in Millions) Down
100 bps
Down
50 bps
Down
25 bps
Up
25 bps
Up
50 bps
Up
100 bps
Down
100 bps
Down
50 bps
Down
25 bps
Up
25 bps
Up
50 bps
Up
100 bps

MSR portfolio

$ (475 $ (210 $ (99 $ 86 $ 159 $ 269 $ (476 $ (209 $ (98 $ 85 $ 159 $ 270

Derivative instrument hedges

418 201 98 (91 (175 (325 375 180 88 (84 (165 (314

Net sensitivity

$ (57 $ (9 $ (1 $ (5 $ (16 $ (56 $ (101 $ (29 $ (10 $ 1 $ (6 $ (44

The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company's servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency ("HFA") mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA division specializes in servicing loans made under state and local housing authority

50 U.S. Bancorp
Table of Contents

programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.

A summary of the Company's MSRs and related characteristics by portfolio was as follows:

March 31, 2017 December 31, 2016
(Dollars in Millions) HFA Government Conventional (c) Total HFA Government Conventional (c) Total

Servicing portfolio (a)

$ 36,462 $ 37,883 $ 157,540 $ 231,885 $ 34,746 $ 37,530 $ 157,771 $ 230,047

Fair value

$ 420 $ 434 $ 1,788 $ 2,642 $ 398 $ 422 $ 1,771 $ 2,591

Value (bps) (b)

115 115 113 114 115 112 112 113

Weighted-average servicing fees (bps)

36 34 27 30 36 34 27 30

Multiple (value/servicing fees)

3.19 3.38 4.19 3.80 3.19 3.29 4.15 3.77

Weighted-average note rate

4.37 3.93 4.01 4.05 4.37 3.95 4.02 4.06

Weighted-average age (in years)

2.9 3.9 3.8 3.7 2.9 3.8 3.8 3.7

Weighted-average expected

prepayment (constant prepayment rate)

9.0 11.2 9.7 9.8 9.4 11.3 9.8 10.0

Weighted-average expected life (in years)

8.1 6.8 6.9 7.1 8.0 6.8 6.9 7.0

Weighted-average option adjusted spread (d)

9.9 9.2 7.2 8.0 9.9 9.2 7.2 8.0

(a) Represents principal balance of mortgages having corresponding MSR asset.
(b) Calculated as fair value divided by the servicing portfolio.
(c) Represents loans sold primarily to GSEs.
(d) Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs.

 Note 7  Preferred Stock

At March 31, 2017 and December 31, 2016, the Company had authority to issue 50 million shares of preferred stock. The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company's preferred stock were as follows:

March 31, 2017 December 31, 2016
(Dollars in Millions) Shares
Issued and
Outstanding
Liquidation
Preference
Discount Carrying
Amount
Shares
Issued and
Outstanding
Liquidation
Preference
Discount Carrying
Amount

Series A

12,510 $ 1,251 $ 145 $ 1,106 12,510 $ 1,251 $ 145 $ 1,106

Series B

40,000 1,000 1,000 40,000 1,000 1,000

Series F

44,000 1,100 12 1,088 44,000 1,100 12 1,088

Series G

43,400 1,085 10 1,075

Series H

20,000 500 13 487 20,000 500 13 487

Series I

30,000 750 5 745 30,000 750 5 745

Series J

40,000 1,000 7 993

Total preferred stock (a)

186,510 $ 5,601 $ 182 $ 5,419 189,910 $ 5,686 $ 185 $ 5,501

(a) The par value of all shares issued and outstanding at March 31, 2017 and December 31, 2016, was $1.00 per share.

During the first quarter of 2017, the Company issued depositary shares representing an ownership interest in 40,000 shares of Series J Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the "Series J Preferred Stock"). The Series J Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable semiannually, in arrears, at a rate per annum equal to 5.300 percent from the date of issuance to, but excluding, April 15, 2027, and thereafter will accrue and be payable quarterly at a floating rate per annum equal to three-month LIBOR plus 2.914 percent. The Series J Preferred Stock is redeemable at the Company's option, in whole or in part, on or after April 15, 2027. The Series J Preferred Stock is redeemable at the Company's option, in whole, but not in part, prior to April 15, 2027 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series J Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During the first quarter of 2017, the Company provided notice of its intent to redeem all outstanding shares of the Series G Non-Cumulative Perpetual Preferred Stock (the "Series G Preferred Stock") during the second quarter of 2017. The Company removed the outstanding liquidation preference amount of the Series G Preferred Stock from shareholders' equity and included it in other liabilities on the Consolidated Balance Sheet as of March 31, 2017, because upon the notification date it became mandatorily redeemable. The liquidation preference amount equals the redemption price for all outstanding shares of the Series G Preferred Stock. The Company included a $10 million loss in the computation of earnings per diluted common share for the first quarter of 2017, which represents the stock issuance costs recorded in preferred stock upon the issuance of the Series G Preferred Stock that were reclassified to

U.S. Bancorp 51
Table of Contents

retained earnings on the notification date. Effective April 15, 2017, the Company redeemed all outstanding shares of the Series G Preferred Stock.

 Note 8  Accumulated Other Comprehensive Income (Loss)

Shareholders' equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders' equity for the three months ended March 31, is as follows:

(Dollars in Millions) Unrealized Gains
(Losses) on
Securities
Available-For-
Sale
Unrealized Gains
(Losses) on
Securities
Transferred From
Available-For-Sale
to Held-To-
Maturity
Unrealized Gains
(Losses) on
Derivative Hedges
Unrealized Gains
(Losses) on
Retirement Plans
Foreign
Currency
Translation
Total

2017

Balance at beginning of period

$ (431 $ 25 $ 55 $ (1,113 $ (71 $ (1,535

Changes in unrealized gains and losses

127 7 134

Foreign currency translation adjustment (a)

10 10

Reclassification to earnings of realized gains and losses

(29 (3 14 29 11

Applicable income taxes

(38 1 (8 (11 (3 (59

Balance at end of period

$ (371 $ 23 $ 68 $ (1,095 $ (64 $ (1,439

2016

Balance at beginning of period

$ 111 $ 36 $ (67 $ (1,056 $ (43 $ (1,019

Changes in unrealized gains and losses

488 (96 392

Other-than-temporary impairment not recognized in earnings on securities available-for-sale

(2 (2

Foreign currency translation adjustment (a)

(16 (16

Reclassification to earnings of realized gains and losses

(3 (5 43 41 76

Applicable income taxes

(187 2 21 (16 5 (175

Balance at end of period

$ 407 $ 33 $ (99 $ (1,031 $ (54 $ (744

(a) Represents the impact of changes in foreign currency exchange rates on the Company's investment in foreign operations and related hedges.

Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings for the three months ended March 31, is as follows:

Impact to Net Income Affected Line Item in the
Consolidated Statement of Income
(Dollars in Millions) 2017 2016

Unrealized gains (losses) on securities available-for-sale

Realized gains (losses) on sale of securities

$ 29 $ 3 Total securities gains (losses), net
(11 (1 Applicable income taxes
18 2 Net-of-tax

Unrealized gains (losses) on securities transferred from available-for-sale to held-to-maturity

Amortization of unrealized gains

3 5 Interest income
(1 (2 Applicable income taxes
2 3 Net-of-tax

Unrealized gains (losses) on derivative hedges

Realized gains (losses) on derivative hedges

(14 (43 Interest expense
5 16 Applicable income taxes
(9 (27 Net-of-tax

Unrealized gains (losses) on retirement plans

Actuarial gains (losses) and prior service cost (credit) amortization

(29 (41 Employee benefits expense
11 16 Applicable income taxes
(18 (25 Net-of-tax

Total impact to net income

$ (7 $ (47

52 U.S. Bancorp
Table of Contents

 Note 9  Earnings Per Share

The components of earnings per share were:

Three Months Ended
March 31,
(Dollars and Shares in Millions, Except Per Share Data) 2017 2016

Net income attributable to U.S. Bancorp

$ 1,473 $ 1,386

Preferred dividends

(69 (61

Impact of preferred stock call (a)

(10

Impact of the purchase of noncontrolling interests (b)

9

Earnings allocated to participating stock awards

(7 (5

Net income applicable to U.S. Bancorp common shareholders

$ 1,387 $ 1,329

Average common shares outstanding

1,694 1,737

Net effect of the exercise and assumed purchase of stock awards

7 6

Average diluted common shares outstanding

1,701 1,743

Earnings per common share

$ .82 $ .77

Diluted earnings per common share

$ .82 $ .76

(a) Represents stock issuance costs originally recorded in preferred stock upon the issuance of the Company's Series G Preferred Stock that were reclassified to retained earnings on the date the Company announced its intent to redeem the outstanding shares.
(b) Represents the difference between the carrying amount and amount paid by the Company to purchase third party investor holdings of the preferred stock of USB Realty Corp, a consolidated subsidiary of the Company.

Options outstanding at March 31, 2017 and 2016, to purchase 1 million and 2 million common shares, respectively, were not included in the computation of diluted earnings per share for the three months ended March 31, 2017 and 2016, respectively, because they were antidilutive.

 Note 10  Employee Benefits

The components of net periodic benefit cost for the Company's retirement plans were:

Three Months Ended March 31,
Pension Plans Postretirement
Welfare Plan
(Dollars in Millions)     2017     2016     2017     2016

Service cost

$ 47 $ 44 $ $

Interest cost

55 52 1 1

Expected return on plan assets

(71 (66 (1

Prior service cost (credit) amortization

(1 (1 (1 (1

Actuarial loss (gain) amortization

32 44 (1 (1

Net periodic benefit cost

$ 62 $ 73 $ (2 $ (1

 Note 11  Income Taxes

The components of income tax expense were:

Three Months Ended

March 31,

(Dollars in Millions)     2017     2016

Federal

Current

$ 531 $ 301

Deferred

(120 107

Federal income tax

411 408

State

Current

65 90

Deferred

23 6

State income tax

88 96

Total income tax provision

$ 499 $ 504

U.S. Bancorp 53
Table of Contents

A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company's applicable income tax expense follows:

Three Months Ended
March 31,
(Dollars in Millions)     2017     2016

Tax at statutory rate

$ 695 $ 667

State income tax, at statutory rates, net of federal tax benefit

63 63

Tax effect of

Tax credits and benefits, net of related expenses

(193 (166

Tax-exempt income

(49 (50

Noncontrolling interests

(5 (5

Other items (a)

(12 (5

Applicable income taxes

$ 499 $ 504

(a) Includes excess tax benefits associated with stock-based compensation under accounting guidance effective January 1, 2017. Previously, these benefits were recorded in capital surplus.

The Company's income tax returns are subject to review and examination by federal, state, local and foreign government authorities. On an ongoing basis, numerous federal, state, local and foreign examinations are in progress and cover multiple tax years. As of March 31, 2017, the federal taxing authority has completed its examination of the Company through the fiscal year ended December 31, 2010. The years open to examination by foreign, state and local government authorities vary by jurisdiction.

The Company's net deferred tax liability was $420 million at March 31, 2017, and $479 million at December 31, 2016.

 Note 12  Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company's operations ("free-standing derivative"). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges  These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the three months ended March 31, 2017, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges  These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At March 31, 2017, the Company had $68 million (net-of-tax) of realized and unrealized gains on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $55 million (net-of-tax) of realized and unrealized gains at December 31, 2016. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2017 and the next 12 months are losses of $9 million (net-of-tax) and $8 million (net-of-tax), respectively. This amount includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the three months ended March 31, 2017, and the change in fair value attributed to hedge ineffectiveness was not material.

54 U.S. Bancorp
Table of Contents

Net Investment Hedges  The Company uses forward commitments to sell specified amounts of certain foreign currencies, and occasionally non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the three months ended March 31, 2017. There were no non-derivative debt instruments designated as net investment hedges at March 31, 2017 or December 31, 2016.

Other Derivative Positions  The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities ("TBAs") and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale ("MLHFS") and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company's MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company's customer derivatives and related hedges are monitored and reviewed by the Company's Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 14 for further information on these swap agreements.

For additional information on the Company's purpose for entering into derivative transactions and its overall risk management strategies, refer to "Management Discussion and Analysis - Use of Derivatives to Manage Interest Rate and Other Risks", which is incorporated by reference into these Notes to Consolidated Financial Statements.

U.S. Bancorp 55
Table of Contents

The following table summarizes the asset and liability management derivative positions of the Company:

Asset Derivatives Liability Derivatives
(Dollars in Millions) Notional
Value
Fair
Value
Weighted-
Average
Remaining
Maturity
In Years
Notional
Value
Fair
Value
Weighted-
Average
Remaining
Maturity
In Years

March 31, 2017

Fair value hedges

Interest rate contracts

Receive fixed/pay floating swaps

$ 3,350 $ 38 3.92 $ 1,550 $ 10 1.83

Cash flow hedges

Interest rate contracts

Pay fixed/receive floating swaps

3,772 5 7.38 1,886 19 .68

Net investment hedges

Foreign exchange forward contracts

1,378 8 .04

Other economic hedges

Interest rate contracts

Futures and forwards

Buy

3,311 25 .09 675 5 .07

Sell

1,989 7 .07 5,100 24 .09

Options

Purchased

4,040 67 7.96

Written

1,018 29 .11 7 1 .11

Receive fixed/pay floating swaps

7,607 47 10.80 741 8.72

Pay fixed/receive floating swaps

1,799 1 8.72 5,404 17 6.20

Foreign exchange forward contracts

14 .06 659 6 .04

Equity contracts

36 .20 75 1 .35

Credit contracts

1,454 3.75 3,856 2 3.48

Other (a)

446 3 .03 1,353 116 2.19

Total

$ 28,836 $ 222 $ 22,684 $ 209

December 31, 2016

Fair value hedges

Interest rate contracts

Receive fixed/pay floating swaps

$ 2,550 $ 49 4.28 $ 1,250 $ 12 2.32

Cash flow hedges

Interest rate contracts

Pay fixed/receive floating swaps

3,272 108 8.63 2,787 35 .83

Net investment hedges

Foreign exchange forward contracts

1,347 15 .04

Other economic hedges

Interest rate contracts

Futures and forwards

Buy

1,748 13 .09 1,722 18 .05

Sell

2,278 129 .08 4,214 43 .09

Options

Purchased

1,565 43 8.60

Written

1,073 25 .07 12 1 .06

Receive fixed/pay floating swaps

6,452 26 11.48 1,561 16 6.54

Pay fixed/receive floating swaps

4,705 13 6.51 2,320 9 7.80

Foreign exchange forward contracts

849 6 .02 867 6 .02

Equity contracts

11 .40 102 1 .57

Credit contracts

1,397 3.38 3,674 2 3.57

Other (a)

19 .03 830 106 3.42

Total

$ 27,266 $ 427 $ 19,339 $ 249

(a) Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $446 million and $19 million at March 31, 2017 and December 31, 2016, respectively, and derivative liability swap agreements related to the sale of a portion of the Company's Class B common shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted average remaining maturity of $907 million, $113 million and 3.25 years at March 31, 2017, respectively, compared to $811 million, $106 million and 3.50 years at December 31, 2016, respectively.

56 U.S. Bancorp
Table of Contents

The following table summarizes the customer-related derivative positions of the Company:

Asset Derivatives Liability Derivatives
(Dollars in Millions) Notional
Value
Fair
Value

Weighted-

Average

Remaining

Maturity

In Years

Notional
Value
Fair
Value

Weighted-

Average

Remaining

Maturity

In Years

March 31, 2017

Interest rate contracts

Receive fixed/pay floating swaps

$ 31,935 $ 729 4.62 $ 50,920 $ 695 4.63

Pay fixed/receive floating swaps

52,918 689 4.47 29,220 635 4.85

Options

Purchased

15,240 21 1.89 349 8 1.07

Written

806 5 2.73 13,112 19 1.57

Futures

Buy

736 .51

Sell

1,467 1.44

Foreign exchange rate contracts

Forwards, spots and swaps

20,936 640 .65 19,409 582 .64

Options

Purchased

3,347 100 1.68

Written

3,347 100 1.68

Total

$ 125,182 $ 2,184 $ 118,560 $ 2,039

December 31, 2016

Interest rate contracts

Receive fixed/pay floating swaps

$ 38,501 $ 930 4.07 $ 39,403 $ 632 4.89

Pay fixed/receive floating swaps

36,671 612 4.99 40,324 996 4.07

Options

Purchased

14,545 51 1.85 125 2 1.37

Written

125 3 1.37 13,518 50 1.70

Futures

Buy

306 1.96 7,111 7 .90

Foreign exchange rate contracts

Forwards, spots and swaps

20,664 849 .58 19,640 825 .60

Options

Purchased

2,376 98 1.67

Written

2,376 98 1.67

Total

$ 113,188 $ 2,543 $ 122,497 $ 2,610

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax) for the three months ended March 31:

Gains (Losses)
Recognized in
Other
Comprehensive
Income
(Loss)
Gains (Losses)
Reclassified from
Other
Comprehensive
Income
(Loss) into Earnings
(Dollars in Millions) 2017 2016 2017 2016

Asset and Liability Management Positions

Cash flow hedges

Interest rate contracts (a)

$ 4 $ (59 $ (9 $ (27

Net investment hedges

Foreign exchange forward contracts

(7 (32

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months ended March 31, 2017 and 2016.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest expense.

U.S. Bancorp 57
Table of Contents

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions for the three months ended March 31:

(Dollars in Millions)

Location of Gains (Losses)

Recognized in Earnings

    2017

    2016

Asset and Liability Management Positions

Fair value hedges (a)

Interest rate contracts

Other noninterest income $ (10 $ 62

Other economic hedges

Interest rate contracts

Futures and forwards

Mortgage banking revenue 6 (47

Purchased and written options

Mortgage banking revenue 40 93

Receive fixed/pay floating swaps

Mortgage banking revenue 31 242

Pay fixed/receive floating swaps

Mortgage banking revenue (40 9

Foreign exchange forward contracts

Commercial products revenue (7 25

Equity contracts

Compensation expense 1 (2

Credit contracts

Other noninterest income 1

Customer-Related Positions

Interest rate contracts

Receive fixed/pay floating swaps

Other noninterest income (250 1,005

Pay fixed/receive floating swaps

Other noninterest income 269 (1,004

Purchased and written options

Other noninterest income (6 2

Futures

Other noninterest income (2 4

Foreign exchange rate contracts

Forwards, spots and swaps

Commercial products revenue 22 17

Purchased and written options

Commercial products revenue 1 1

(a) Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $10 million and $(61) million for the three months ended March 31, 2017 and 2016, respectively. The ineffective portion was immaterial for the three months ended March 31, 2017 and 2016.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into derivative positions that are centrally cleared through clearinghouses, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company's net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company's collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company's net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company's credit rating from two of the nationally recognized statistical rating organizations. If the Company's credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at March 31, 2017, was $476 million. At March 31, 2017, the Company had $449 million of cash posted as collateral against this net liability position.

 Note 13  Netting Arrangements for Certain Financial Instruments and Securities Financing Activities

The majority of the Company's derivative portfolio consists of bilateral over-the-counter trades. However, current regulations require that certain interest rate swaps and forwards and credit contracts need to be centrally cleared through clearinghouses. In addition, a portion of the Company's derivative positions are exchange-traded. These are predominately U.S. Treasury futures or options on U.S. Treasury futures. Of the Company's $295.3 billion total notional amount of derivative positions at March 31, 2017, $140.5 billion related to those centrally cleared through clearinghouses and $2.2 billion related to those that were exchange-traded. Irrespective of how derivatives are traded, the Company's derivative contracts typically include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all derivative positions between the Company and the counterparty. Collateral is typically cash, but securities

58 U.S. Bancorp
Table of Contents

may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 12 for further discussion of the Company's derivatives, including collateral arrangements.

As part of the Company's treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.

Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities or residential agency mortgage-backed securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company's broker-dealer. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral levels.

The following table summarizes the maturities by category of collateral pledged for repurchase agreements and securities loaned transactions:

(Dollars in Millions) Overnight and
Continuous